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Today, we have a guest post from a financial planner, Daniel Morgan. We had the pleasure of speaking on Good News For the City on WAVA. Listen to our Podcast, as we discuss some things that you can do to prepare for this new year. Enjoy the read!
Daniel Morgan founded Independent Financial Planning, LLC in January, 2015. He specializes in identifying solutions to help families make the best financial planning decisions unique to them. Daniel began his career in financial management with Smith Barney as a part of the Commonwealth Group. He received his degree from the University of Virginia in 2004, and in 2014, earned the CERTIFIED FINANCIAL PLANNER™ designation.
In the age of the Robo-Adviser, the question often arises: why use a financial planner when you could use a Robo-Adviser for much cheaper? Well, for starters, many professional advisors not only manage investments, but they also provide financial planning. There are more than 15,000 professional advisors but only 200 Robo-Advisers. It can be hard to compare the two as there is clearly a much larger variety when it comes to professional advisors. However, when looking at the best of both worlds, I think you can attempt a fair comparison. From a financial planning perspective, the Robo-Adviser falls short. Although, within investment management, Robo-Advising can be a suitable alternative.
Financial planning focuses on one’s financial circumstances and goals. It incorporates applicable financial information in order to create the best path for the investor. Fundamentally, financial planning is a time-consuming, question-heavy process. It does more than provide a diagnostic. It also provides specific recommendations to holistically achieve one’s goals. The process is important and can vary greatly depending on whose services you use.
Some Robo-Advisors offer financial planning services with trained CFPs (CERTIFIED FINANCIAL PLANNERs). I can only hope that their advice is holistic. There is a difference between financial planning in general and financial planning in terms of investments. Many professional advisors provide a more tailored product than what you would find on the Betterment planning platform. Notice how each major life event described on Betterment’s financial planning page discusses planning in terms of investing. The fact is that sites like these focus on investments in terms of financial planning.
Here’s another example. Look at your employer’s 401(k) provider. They also provide investors with, what I believe is, a false sense of financial security. Most of them really only have a savings and cash flow calculator: “If you save X-amount and it returns Y% with Z% inflation, you’ll have V-amount per month in your retirement.”
In fact, the homepage of Empower Retirement attempts to show how much you need in retirement income. This is very helpful for an investor. While, saving 75% of your pre-retirement income is a first step, if anything, that shouldn’t give an investor any significant confidence regarding their retirement. Thus, they encourage more 401(k) savings. However, they neglect to provide the investor with proper retirement planning advice.
Robo-Advisers have successfully employed the use of index funds and ETFs. In both cases, these are great ways to capture the general return of the market as characterized by the index, since they own every position within the index. For the vast majority of investors, this is a sufficient place to start, and ultimately, a good place to stay. There is an everlasting debate between active and passive management. Clearly if you are a passive management believer (and the data suggest you should be in the recent years), the Robo-Advisers are providing you with a good product.
However, investment management isn’t so straight-forward. There are investments specifically designed to outperform indices, like structured products such as buffer notes or even mutual funds. Additionally, ETFs do not work nearly as well in fixed income as they do in domestic equity markets. Even international markets can have some trading issues. Though, they are generally resolved over the long-term.
The Future of Robo-Advisers
When it comes to investments, Robo-Advisers will give you a good, vanilla investment portfolio. Since Robo-Advisers were first introduced around the 2008 nadir, not enough time has passed to know if Robo-Advisers yield top-notch results. It will be interesting to see if investors can keep their money invested for the long-term with these Robo-Advisers, when the market corrects again.
The Edge of the Financial Planner
Financial planners, in their minimalist capacity, should at least be a sounding board for investors. They can be a great voice of reason when the emotional element of investing in a volatile market takes its toll.
On top of that, financial planners are extremely useful in other scenarios. They can handhold clients when tax laws change. Most people don’t stay on top of tax laws, so a financial planner should point out areas where their client could save money in that area. Even knowing the proper withdrawal rates can be confusing for the average person, but a financial planner would be able to provide the appropriate rates for their client.
The last concern to mention are motivations. Whenever you work with any professional or engage in any service, it is wise to determine their motivations. For a relatively new industry such as the Robo-Advisers, we haven’t seen much litigation. However, litigation is an enormous concern to most financial planners and is definitely a motivation. The same concern has already filtered its way into the Robo-Adviser space because both financial planners and Robo-Advisors utilize the same models. Thus, both financial planners and Robo-Advisors share the same risks.
I’m glad that Robo-Advisers are available. If you have no financial background, Robo-Advisers are a helpful tool for helping people to invest. Any financial planners that competes solely on stock market performance should be pushed and squeezed. If anything, Robo-Advisors should motivate human financial planners to consistently beat the market or risk losing market share to Robo-Advisors, who offer similar performance and lower fees.
If all you are looking to do is trying to beat the stock market, Robo-Advising may be a great option for you. In contrast, the real value of a financial planner is that they will take a more holistic look at your financial health. They will provide custom-tailored financial recommendations that will maximize your financial situation. While not everyone requires this level of detail, for those that do, financial planning services are invaluable to them.