I can think of nothing spookier and more like science fiction than turning to a robot for advice on my savings and retirement accounts but, believe or not, the time is neigh. Two companies, Betterment and Wealthfront are betting their robots can provide quality advice and undercut even low fee brokerages like Charles Schwab and Vanguard. Since human brokers are eliminated, replaced by computer programs, investors need only a modest amount of money to get into the game and benefit from the lowest fees in the business. These robots won’t play the market but are said take a conservative path to wealth management, a path which has its good and bad points.
What your robot will do is “give you a preset mix of stocks and bonds and shift them as you age to reduce risk. (Ibid pg. 73) It’s prime objective is to put your money in solid companies and hold, except for occasional tweaking, which includes keeping an eye on your tax liabilities. (“Meet Your New Financial Adviser,” by Ian Salisbury, Money Magazine, April 2015 pg. 75.) If working with a robot is too freaky for you, other startups will combine the robot with a human. Personal Capital is one. Of course, the costs go up with the pairing.
Unfortunately the system has its limits. Robo-advisers aren’t much help for retirement savings invested in a 401(k) program because “employers have so much control of 401(k) options.” (Ibid pg. 75) That’s a hurdle, however, the companies are working on. In the meantime, the investment industry is watching this new technology and both Vanguard and Schwab are dipping their toes in the water. As author Ian Salisbury admits, Robo-Advisors haven’t threatened the old guard yet. But the future is coming and the savvy younger generation, who is friendly with electronics, isn’t aren’t going to pay a broker to put them in a mutual fund, which is something they can do for themselves.
Simple, cheap and conservative is a pretty good combination for a small investor hoping to set aside a little for retirement. Moving money around too often is costly and chasing the market is foolish. A Robo-Adviser is programmed to know that buying cheap and holding is a good investment strategy for Main Street.
If I were younger, I might consider making friends with a robot. But I’ve already programmed my human broker to laugh at my jokes.
(Originally posted 4/15/15)