4 Things To Know About ‘Robo-Advisors’

April 17, 2014

3. They rebalance for you, but they can’t protect you from emotional investing.

The rebalancing of your portfolio is automated with a robo-advisor. That’s a good thing because rebalancing is essential in investment management.

“Advisors time markets poorly; I’m not sure robo-advisors would do any worse,” Roth said. “Humans are predictably irrational, whether they’re advisors or consumers. If you can automate the process, you’re harnessing the power of inertia, and that’s a good thing.”

But there are caveats. For starters, your portfolio is practically built based on a survey—which reflects your tolerance for risk, among other things. The problem with answering an automated survey is that you might feel more inclined to take on risk when the market is doing well, but feel far more conservative in bear markets.

If you turned to a robo-advisor, say, in March of 2009, you probably ended up with a portfolio that’s heavily allocated to the safety of bonds, and you would have missed out on the stock rally that followed. So, automation here means you might be starting off with an asset allocation that doesn’t necessarily jibe with your long-term goals depending on how you feel about the market.

Beyond that, robo-advisors might rebalance your portfolio for you, but they won’t stop you from bailing out of your investments in bear markets—a time when many investors get out of the market as they panic.

“We [traditional advisors] earn our fee when times get tough,” Goldberg argues. “There are significant dollars behind the technology of firms like Wealthfront, and they’ve come up with some good technology, but we develop similar algorithmic rebalancing strategies that use high-powered software, but we don’t let the software make the decisions.”

 

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