For Betterment or Worse

RoboDogIs a Robo Adviser a substitute for The Real Deal?

Many younger investors and sometimes their advisors rely on the robo-advisers for investment management and even broader financial advice. In any business venture, the first question is Why?[1] Cheap is the first answer. Easy comes to mind in talking with younger advisors. Benefits for certain, but I rarely hear the word “best” or even “better”.

Clearly younger investors are comfortable with technology and certainly know how to exploit its time saving benefits. They are less likely to meet their advisor in the office. Virtual meeting is popular and becoming much more efficient. This generation tends to be very hands on experiential learners. For these and other reasons, advisors of every generation need to be embracing technology and learning to leverage its power.

One observer ventured that younger advisors came into the business with the singular goal of doing planning. For the most part, they choose not to pursue careers with the wire houses and broker dealers unless trading, transactions and investment analysis is a career choice. As such, they have limited exposure to the investing side of the business and it would be natural to seek to outsource this side of the business. The robos are a convenient alternative and may appeal to their clients.

But what about what’s Best, or even Right for the client? I find there are several flaws with the robo- adviser concept. Moreover, I challenge advisors that use them to think about the long term relationship with the client and whether technology is driving a wedge between you and your clients.

To begin with, I have compared the Betterment funds with others in the same asset classes and found them to be poor performers. Yes they are cheap, but cheap for a reason. There is clearly little thought that went into selecting these funds. I question whether Betterment did much research, since there are equivalent low cost funds with much better performance, lower risk and better exposure to growth opportunities such as emerging markets.

Next, I have been told that one of the challenges younger investors face is saving enough. Fidelity has published volumes and maintains current information on how much to save to ensure a comfortable retirement at age 67. However, the student debt burden along with the fact that many Gen-X, Gen-Y and Millennials started late in forming households has impeded savings. Even though many are high earners, there are a lot of places for that income to go. Strategies to wring just a minor incremental amount out of the budget for savings can have an enormous impact on wealth building. This is where the interaction with an advisor, a custom financial plan with a budgeting and cash flow management tool could make a big difference for the client and competitive advantage for the advisor.

The Robos have a lot of articles on their impressive websites, almost too much. People can only focus on a few things consistently and consistency is the key to replacing bad habits with good ones.

The recession was surely a big headwind. However, the economy is growing, inflation is low and wages, albeit somewhat stagnant are at least keeping up with inflation and growing in real terms for the HENRYs (High Earnier Not Rich Yet).

One key to being an effective and valued partner is for advisors to help clients increase their savings rate. Richard Thaler, the 2017 Nobel Prize winner in Economics is a pioneer in behavioral finance. One of his key contributions has been developing incentives to help worker increase their savings rates. His landmark book, Misbehaving: The Making of Behavioral Economics[2] contains a very clear set of recommendations that have proven successful in boosting savings rates. These tactics essentially involve using our human tendencies to make saving easy and, in some ways, automatic.

The first is making enrollment in employer sponsored 401-K automatic. That is, the default is enrollment at a predetermined saving rate. The second he calls “Save for Tomorrow”. That means committing to incremental increases in savings with each raise in pay over say a four year period. Since most younger employees are eligible for 401-K plans, employers should be encouraged to make enrollment the default option.  Advisors could play a role by providing their clients a “Contract with their Retirement Self”; a written commitment to start at a set savings rate and increase it each year. Written goals are far more likely to be achieved and there is no better path to success than to enter into an agreement with one’s current self, one’s spouse, children and future self.

The advisor can then help the client by developing cash flow plans. Often financial planning software is goals based, more suitable for mature clients. Cash flow planning may be more appropriate for younger clients who need to allocate monthly take-home pay such that they “pay themselves first”.

Human advisors can be far more effective than a website in helping clients develop good saving habits by leveraging human behavior to serve their clients. But this is only one side of the coin. The other side is good investing behavior. This is where the advisor has a true upper hand.

When the market is favorable it is easy to enjoy the benefits and a website is a good way to keep tabs on the good news. But there are a host of problems that could be lurking and when things turn south, there is little that a website can do to reassure a nervous client, let alone prevent dangerous mistakes. Who would trust a generic website article when the pain is real and very personal? They will listen to and follow the advice of a person who has earned their trust and confidence. Most younger investors have not lived through a a sustained bear market or even a major market correction. Seasoned advisors have and can bring wisdom and perspective to troubling times.

Another benefit the human advisor provides is the ability to conceive of adverse events and to shore up a portfolio and make it more resilient. Proactively designing shock absorbers may be a possibility with algorithms, but human wisdom developed from experience continues to be the best solution. As Mark Twain stated:

Good judgement is the result of experience and experience the result of bad judgement

Only humans can learn the lessons of bad judgement, either their own, or in the case of financial advisors, that of others.


[1] Please read Simon Sinek’s best seller Start With Why. It is easily one of the most influential business books I have read in my 40+ year career and should be required reading of every college freshman, again in the first year of professional or graduate school and before starting that first job.

[2] New York: W.W. Norton & Company, [2015].