What A Zombie Apocalypse Can Teach Us About Robo Investment Advice

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The demands of investors- particularly millennial investors- are dramatically changing how people find and use investment advice. One massive trend is the shift toward automated investment services, or using “robo advisors”. Is this type of service ultimately better for investors?

Now, the zombie reference is an exaggeration. But it’s used to make the point that robo advisors may mean less human interaction than traditional investment advising.

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Charles Schwab’s stunning results, other managers

I was frankly stunned to read to Charles Schwab’s automated investment service grew about 29% to $5.3 billion at the end of the 4th quarter. The article makes a good point: This increase occurred during a volatile 4th quarter of 2015.

As I mentioned in this post, other money managers like Betterment and Wealth front are also growing rapidly. Investors are moving toward these managers and away from investment advise provided by a financial advisor.

How these investment services are different

OK, so if you’re not sitting down one-on-one with a financial advisor, what’s the process? Well, you can answer that by reviewing the Schwab website:

Schwab Intelligent Portfolios

The Yahoo article describes this service as a “robo-advisor that allocates cash among exchange-traded funds (ETFs)…according to formulas based on client questionnaires”.

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The Schwab site states that there are no advisory fees or commissions charged. The service builds an ETF portfolio with 20 asset classes. An asset class, by the way, is defined as a group of securities that share characteristics. Highly-rated corporate bonds, for example, might be an asset class.

This video explains the basics of the Schwab process:

  • Input your goals and answer questions: Now, keep in mind that FINRA (the industry regulator) requires that financial advisors recommend investments that are suitable. Advisors determine suitability by asking the investor questions about age, other investments, financial and tax status, investment experience, time horizon for investing and risk tolerance- among other things. The purpose of asking the investor questions is to recommend suitable investments.
  • Schwab uses the customer information to create an ETF portfolio. An Exchange Traded Portfolio (ETF) is a marketable security that tracks an index. An index is a particular basket of stocks, bonds or other investments. ETFs trade like a common stock on an exchange. Unlike mutual funds, an ETF’s price changes throughout the trading day- just like a stock. ETFs are also less expensive than mutual funds. The Standard and Poor’s 500, for example, is a basket of 500 large company stocks. You can buy an ETF based on the S&P 500 index.
  • Rebalancing: As the composition of stocks in the index changes, the ETF’s portfolio changes to match the index. Say, for example, that IBM common stock changes from 1% of the S&P 500 index to 1.5%. The ETF would buy more IBM (and sell other securities) to match the index.
  • Alerts (the best part): What I really like about the robo-advisor platforms is that you get an alert if you get off track. Schwab explains that if you miss a monthly contribution into your account, for example, you get a notice. The system can also help you plan withdrawals- and keep those withdrawals on track, based on the plan you lay out.

In addition to Schwab, Fidelity is building a robo-advisor platform called Fidelity Go. Blackrock is creating FutureAdvisor, which will be out in August of 2016.

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Do you need more human interaction?

The bottom line is that all of these services offer great, easy-to-use platforms that allow you to monitor your investments.

I mentioned in this post several reasons why millennial investors have less confidence in many institutions, including the traditional investment community. They prefer a more passive investing model using this great technology.

This all sounds great, but I still have this lingering concern: Do you need more human interaction to really stay on track? I say this because staying on track (investing each month, sticking with the right portfolio) can make a HUGE difference over an investing lifetime.

A scenario

Here’s an example: Say that you own an EFT that mirrors the S&P 500. A calamity causes the index to fall 10% in a month. Your robo-advisor system alerts you to the decline.

Is this enough to keep you in that portfolio? Would it help it a personal financial advisor- someone you meet with- calls you up and explains how you should stay the course (not sell)?

Give this scenario some thought. Heck- most of us can’t diet and exercise without help. Can we invest without a specific person to keep us on track?

As always, this post is for educational purposes only.

Have used any of these ideas? I’d love to hear from you.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl

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5 thoughts on “What A Zombie Apocalypse Can Teach Us About Robo Investment Advice”

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