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The Pros and Cons of Robo Advisors

Topics Covered:

  • Rapport Financial is now offering Fixed Fee Financial Planning Packages. Don’t have 250k to invest? Not to worry, we can still work together.  Contact me to learn more.
  • Are you using Betterment, Wealthfront, or another Robo Advisory service?  Do you fully understand how these strategies work?  The pros and cons?  I’ll fill you in on something they don’t want you to know.

One of my mentors once told me something that has stuck throughout my career:

“Price is only a major factor in the absence of value.” 

I begin with this quote for a reason.  Over the past few years, Robo Advisors have grown in popularity.  I often come across them when advising my peers and providing holistic financial planning services.

In order to better understand the appeal of Robo Advisors, I began asking my peers why they went with a Robo Advisor instead of a DIY solution, or a human advisor.  Overwhelmingly the response was “low fees.”  But as I prodded further it became evident that the majority couldn’t explain why beyond this low fee benefit.

So allow me to share the pros and cons of a Robo Advisor as objectively as I possibly can, because as a consumer you should have an understanding of the services that manage your hard-earned money.

Pros:

  • Low Fees and Minimums.
  • User-Friendly Experience.
  • Automated Asset Management and Rebalancing.  This is the most valuable ongoing feature a Robo Advisory service provides.  The algorithm is designed to bring your portfolio back to its original allocation (plan) so you’re not taking on more risk than you can handle.  And you get an efficient portfolio built for you without having to concern yourself with choosing the investments.
  • Tax Loss Harvesting.  This is actually both a pro and a con.  The pro is that they can proactively take losses to offset gains in your taxable account.  However, this is where things get interesting.  This automated tax loss harvesting feature possess risks and may not be as valuable as they claim.  The drawback here is that the automated tax loss harvesting exposes you to  wash sales that wipe away the benefits of tax loss harvesting.

Cons

Finally, if you happen to use Wealthfront or Betterment, remember that they fill one gap: asset management via an automated service. Which has worked during a bull market like the one we’ve been in for nearly 10 years. But Robo Advisors emerged after the financial crisis and had yet to experience significant corrections and market volatility until this year.

What happened to the Robo Advisors when volatility finally returned?  Crashing websites.  Customers unable to log in to their accounts.

For more information on my services, and to book a 15 minute free consultation visit my calendar.

Warm Regards,

Aaron L. Hattenbach, AIF®
[email protected]

 

The opinions expressed herein are those of Rapport Financial, LLC (RF) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing.  You should not consider the information in this letter as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this newsletter. These securities may not be in an account’s portfolio by the time this report is received, or may have been repurchased for an account’s portfolio. These securities do not represent an entire account’s portfolio and may represent only a small percentage of the account’s portfolio. partners, employees or their family members may have a position in securities mentioned herein.  Rapport Financial was established in 2017 and is registered under the Investment Advisors Act of 1940. Additional information about RF can be found in our Form ADV.

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5 Questions to Ask Your Financial Advisor

I was recently in a meeting with a new client where we went over the scope of my services, and what I charge for advising my wealth management clients. It’s always been my practice to provide a transparent and detailed description of my fee structure so clients know exactly what they are paying me to advise them and manage their assets. With that said, here are the first 5 questions you should be asking a financial advisor before signing any legal documents:

1. What are ALL the ways that you and your firm are compensated for your services, and are they fully disclosed?

How much you’re paying for the management of your assets shouldn’t be a mystery, but usually this is anything but an easy answer for most providers. I can’t tell you how many times I’ve asked prospective clients, “what do you pay your current advisor” and draw a blank stare. Would you ever purchase a product without first knowing its price?

If you’re speaking with an Independent Advisor ask for their Form ADV Part 2. You can access this directly on the SEC website: https://www.adviserinfo.sec.gov/.

Remember, if you don’t know exactly how much you’re paying, you’re almost certainly paying too much!

2. Does your compensation depend on the investment strategies that you recommend?

The fees paid for different investment products can vary significantly, ranging from very little (indexed ETFs), to modest (active mutual funds), to exorbitant and very often unnecessary (derivatives, structured notes, annuities, hedge funds). This can bias recommendations towards more expensive investment products.

Your advisor should have no economic interests in the investment strategies they recommend!

3. What conflicts of interest do you face in advising me?

The answer should be none. Most financial advisors are not fiduciaries. Instead, they are outside sales agents for banking institutions with sales quotas in an antiquated business model.

Consider hiring a Fee-Only Registered Investment Advisor. An advisor working in this model is required by law to act in a fiduciary capacity and put their clients’ financial best interests first. The Fee-Only advisory model aims to remove many of the conflicts of interest found within traditional brokerage firms, i.e. UBS, Merrill Lynch, Morgan Stanley, etc.

4. How will you evaluate the success or failure of my portfolio over time?

This shouldn’t be just a performance number relative to the stock market, but rather whether the portfolio has met your stated goals, income and liquidity needs, tax considerations, liabilities, risk tolerance and other factors or preferences specifically addressed in your Investment Policy Statement.

This is only possible if these matters have been formalized in an Investment Policy Statement that defines the purpose of the portfolio and how it will be organized, formalized, implemented and monitored. As a part of the Investment Policy Statement, specific indices and benchmarks (S&P 500, Barclays Aggregate Bond, etc.) should be defined for the evaluation of performance so that no ambiguity will exist. Risk management is both the most crucial part of portfolio construction and the only real aspect that can be controlled — get the downside risks covered appropriately and the upside will take care of itself.

As one of my mentors used to say, “Don’t confuse a good advisor with a bull market!”

5. What services does your firm provide besides investment advisory?

Wealth Management/Investment Advisory is a full-time job. Be highly skeptical of firms that offer a number of unrelated or tangentially related services such as insurance, estate planning, tax preparation, banking, credit, etc. It is difficult for any firm to have more than a single core competency, and efforts to do otherwise typically lead to sub-standard offerings. The consolidation of the financial services industry has profited service providers more than their customers as its goal is to create cross-selling opportunities rather than a quality and customized service offering.

Financial advisory services should be more than just the core competency of the firm you work with, it should be the ONLY competency.