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Why Your Robo-Advisor Can't Help You Achieve Your Financial Goals... - Outside View by PersonalFN

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Why Your Robo-Advisor Can't Help You Achieve Your Financial Goals...
Apr 17, 2017

Will robots replace humans in the workplace altogether?

The question may sound blasphemous.

But unfortunately, some robo-advisory platforms are propagating a wrong message. Many of them are presenting robo-advisory solutions as a substitute to financial planners. While there is no denying that a basic financial plan can be designed with the online platforms; a detailed one is too complicated for it to handle. At best, robo-advisory platforms can deal with the quantitative aspects of financial planning, but they might fail miserably because they are incompetent to consider the qualitative aspects.

Take this as an example...

If the fundamentals of our economy change drastically, robo advisors won't be able to address this problem without human intervention. Under such a scenario, can companies offering such services accept the responsibility of ill advice?

And this one too...

If you think such instances won't happen too often, please consider ones that take place quite frequently. Suppose, interest rates are coming down can robo-advisor generate active calls for refinancing older loans with the new ones?

How about this one?

In a dual income family only one person takes all financial decisions, but both husband and wife have different risk appetite. Whose risk profile should be taken into account when suggesting the appropriate asset allocation?

Mr Robo, please solve this problem as well...

A couple is struggling to decide the priority of their goals.


Can your robo-advisor offer you holistic counselling on estate planning?

How competent is Mr Robo to advice you on the impact of a particular macroeconomic development on your portfolio?

Assume there is a sudden drop in global financial markets and you don't know what caused the brouhaha in the market. Can you make a phone call seeking information?

As mentioned earlier, there's no emotional bias while processing information due to the lack of human intervention. So asking relevant questions and challenging the output could be tough. Quality of advice would solely depend on quality of input.

Now you may wonder if there are so many negatives of robo advisors in financial planning why even opt for them in the first place.

Robo advisors can help you in a number of ways if you utilise their services correctly.

There are 4 main reasons why robo-investing is gaining popularity...

Unlike financial advisors who often have discriminating policies for smaller investors, robo-investing platforms treat all investors the same.

  1. They offer a reasonable level of customisation of portfolio construction at an affordable cost.
  2. Robo advisors construct and to a certain degree review the portfolio taking into account one's risk appetite and time horizon to stay invested.
  3. Since the portfolio construction and review doesn't involve human intervention, there's no room for speculation.

All worthy robo-investing platforms will have 3 things in common:

  1. They will charge you fees and justify it with their performance
  2. They will offer you direct plans-saving you a great deal of cost over the long term.
  3. And, they will have a proven track record of providing mutual fund schemes with well-researched advice

But please be cautious about data privacy...

You ought to reveal a lot of personal information to robo-advisors. But considering the rise of phishing and cyber-attack cases, you need to be extra careful, by ensuring that the platform you are using has stringent cyber-safety measures for your data. Though, a robo advisor may help you plan for your goals, you still need to realign your financial goals, and this may pose a challenge.

For more personalised financial planning, seek services of a Certified Financial Guardian, who is a mark of trust and respect in the sphere of investment advisory.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Jul 18, 2018 03:37 PM