I recently had a friend ask me how he could trust that a financial planner would be better than either robo-technology or him at picking a portfolio allocation and managing his investments over time. Since I imagine other people, like you, have the same question he does, I’ll share my answers to both my friend and you here.

Spoiler alert: I believe anyone can do it themselves if they are so inclined, but for the majority of the world, the absolute best experience is that of a professional advisor working with robo-technology. Now that I’ve said that, let me explain why.

The Starting Point for Our Comparison

Truth be told, I have no idea how my friend currently invests, or how you do, for that matter. For all I know, you could be the next Warren Buffet. Since you’re asking this question, though, I’m going to assume that you’re not. As such, I’ll be using data based on the average do-it-yourself investor.

I’ll also assume that the robo-technology and the advisor share a similar investment strategy based on beliefs in modern portfolio theory and the efficient market hypothesis. However, since most do-it-yourself investors do not have a written investment policy statement for their portfolio, or even a cohesive cross-account strategy, I will not lump them into the same group.

Baseline – The Do-It-Yourself Investor

With Google and the internet being at everyone’s fingertips, the information you need in order to invest your own money is out there, easily accessible to everyone. Armed with that information alone, many people successfully invest their hard-earned money all by themselves. Those people usually have the time and inclination to learn about different investment strategies and implement the one that works best for them. (Just like anyone else, I have my own bias as to which investment strategy is best. You can read more about it here.)

At the end of the day, my point is that you can totally do the technical work that robo-technology and advisors do for your portfolio ON YOUR OWN. No advisor has any secret sauce to investing, and anyone that tells you otherwise is either lying to you or to themselves.

Where Do-It-Yourself Investors Typically Fall Short:

Even though you can be successful going it alone, data shows that, on average, the likelihood of doing so is relatively low. Let’s take a look at the common mistakes people make:

  1. Lack of a plan and lack of discipline:

    Developing a holistic investment plan and execution strategy is incredibly important. Even more important is to plan it out when the markets are not in turmoil and you are in a mentally calm space. Almost all professional investment managers write out an investment policy statement for each client to give them a document to refer back to when it feels like the investment world is in a tailspin. A good investment policy statement (IPS) should lay out:

    • the goals you want to achieve in your life using the investments
    • which types of investments will be included in the portfolio
    • the percentage allocation to the chosen investments
    • when and how rebalancing back to the target allocation will be done
    • what happens when a market downturn occurs
    • what circumstances allow for changes to the plan and how those changes take place

    As I alluded to earlier, unless you work with a professional, this is almost unheard of for the typical self-directed investor. But, thinking through these items before a market crash happens allows you to look back and simply follow the plan rather than having to make decisions when fear might be creeping into your mind the most. The written policy will help you to remember why you’re investing in the first place and to keep you from…

  2. Getting too emotionally involved:

    It’s a great feeling to see your investment portfolio increase in value over time, especially without any real work on your end. On the flip-side, it can be an even greater magnitude of scary when you watch your portfolio drop, maybe even in half, like a globally diversified portfolio of stocks would have done in the 2008 Great Recession.

    Humans are emotional beings and money is an emotional trigger. People tend to freak out and make rash decisions when markets go up or down. Buying low and selling high goes against everything our natural inclinations are telling us. For example, when an investment is doing well, our intuition usually tells us to let it ride, but the prudent thing to do is to sell some of it once it gets to be larger than a pre-defined percentage of your portfolio and invest in something else that has not done so well (a process called rebalancing). Again, that’s where having a well thought through plan ahead of time helps to remove some of the emotion from your decision making.

  3. Trying to guess the next home run stock:

    My experience has told me that most people view investing as picking a few stocks and hoping they pay off big. Why do they see it that way? Perhaps movies like “Wall Street” or “The Wolf of Wall Street” have led people down that path. It could also be that they’re stuck in the past, in a time where you had to call your stock broker to invest in the market and could really only choose a few at a time. Or maybe they’ve seen Silicon Valley investors make millions off of a few (private) investments and have the same expectations for themselves. Whatever the reason, it rarely ends well.

    Unless you have information about a stock that the rest of the market doesn’t have, it’s really tough to guess when a particular stock is going to go up in value and when you’re going to lose money. Most of the time, people buy a stock because it has already done well. They chase past performance, thus buying it high. Then they hope it continues to go even higher from there. Sometimes it does. Sometimes it doesn’t. The question is: is it worth the risk?

    Picking individual stocks based on past performance also has a tendency to overexpose investors to particular sectors that have done well. Just take a look at what happened in the late 1990s. People were buying technology stocks and only technology stocks. And then the tech bubble burst, sending their stock prices plummeting…

    My view is that picking a few individual stocks is more like speculating, like gambling on those few stocks. If you really want to invest in the market, low-cost, passive vehicles like index funds and ETFs are a much better strategy. Always remember, baseball players who try to hit home runs tend to strike out a lot too.

How an Advisor Can Help – Regardless of Whether It’s A Robo or A Person

Regardless of whether you work with robo-technology or a human advisor, there are a few things they both can do to offload some of your burden in the pursuit of your goals. And goals are the reason you invest, right?

The most obvious items to delegate are the tactical things that need to get done to maximize your portfolio: investment research, trading, and rebalancing. These are certainly things you can do on your own, but be honest with yourself…will you?

You’ll also get an objective third-party involved in the process who will keep an eye on your nest egg for you. This helps to mitigate any emotional issues that may arise and ensures the right thing is done at the right time, even the right thing feels counterintuitive at the time.

Where a Robo Shines

If you’re anything like me, you like trying out new technology. Sometimes that technology is good. Other times, not so much. I’ve tried out a few of the different robo technologies out in the marketplace, and while not perfect, in this case, they’re pretty good.

They all do a beautiful job of using algorithms to keep your investments aligned with the target investment allocations they set for you, and they are pretty good at communicating with you when something happens (like when dividends are received and reinvested or when they decide to change investments within their target model). All-in-all, it’s largely stuff that a human money manager or custodian would do for you anyway.

The biggest benefits I saw were around the convenience and cost of these technologies.

All of these technologies had an app, meaning you can get started right from your phone without ever having to talk to another human being. On top of that, they each have the ability to automate savings in one way or another. Some round up to the nearest dollar when you make purchases and invest the spare change. Others leave the determination of how much to save completely up to you, which may or may not be a good thing in helping you to achieve your long-term dreams.

If you’ve decided you are not a do-it-yourself investor and want someone to manage investments for you, it’s highly likely you will pay less to have an app keep your investments in balance than if you were to pay a person. Robo advisor fees range anywhere from “free” to 0.89%. I put “free” in quotes because nothing is ever truly free. The ones that don’t charge you anything are forcing you into a minimum allocation of particular investments where they are splitting earnings with you and making money that way. In comparison, the standard human advisor typically charges 1% of any assets that they manage. Until recently, those same advisors required a minimum portfolio size in order to invest with them, but companies like mine and many others (which can be found in groups like XY Planning Network and Garrett Planning Network) no longer have that requirement. Also, to be totally fair, a human advisor is usually doing more for you than simply managing your investments.

When You Want the Human Touch

While either a person or technology can manage a portfolio effectively, let’s face it, everybody needs a 3rd party to talk to about life and money. And with that, technology just won’t do. It doesn’t have the shared human experience that helps bring value and perspective in talking through potentially tough decisions.

A good human advisor will typically take the time to get to know you and what makes you tick, and he or she will be providing advice and accountability around a much more comprehensive scope than the technology is capable of. Think student loan planning, which accounts to save money in for different types of goals, or tax planning – none of which a robo can help you with.

Behavior is another area where having someone to talk to and keep you on track means you are much more likely to succeed than on your own or simply with technology. Sure, an app can send you reminders of things that you should be doing, but will you actually pay attention when it does? Personally, it depends on what the app is reminding me to do. For example, I am really bad at drinking enough water through the day. So I got an app to remind me at different points during the day to drink another glass. The problem is, I never, ever drink water when it tells me to. I’ve become too desensitized to the alarm and instead of picking up another glass, I just continue about my day like it didn’t even happen. However, the opposite is true when a person tells me I should drink more water. In those instances, I immediately pick up a glass and start drinking. It’s mostly out of guilt, of course, but it definitely gets me to change my behavior for a little while, until I need another reminder.

Vanguard did a study in September of 2016, called Quantifying Advisor’s Alpha, to see if they could quantify an advisor’s behavioral impact on their client’s portfolio. By their numbers, behavioral coaching equates to about 1.5% in typical added value per year, nothing to sneeze about. See their breakdown of other components below:

Vanguard Advisors Alpha Graph

Why You SHOULD Pick a Combination of the Two

As you can see in the chart above, there are some items I previously discussed where technology can add value (rebalancing, cost-effective implementation, asset location to some extent) and some that only a person can help with (behavioral coaching, spending strategy). So why not marry the two? Find a fiduciary advisor who leverages technology to give you a better experience. It’s the best of both worlds. You’ll have someone to talk with about life and money, someone to help you make the tough (but right) decisions when markets aren’t doing well, and someone who can better focus on the things only they can help you with since they have the technology running in the background, keeping an eye on your portfolio. Sounds like the best of both worlds to me

Remember this Coke Zero commercial? It’s a funny reminder that often times, things are better together.

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