Power to Robo-Advisors

The word is that Robo-Advisors are good for your financial health. Why? Because they offer similar services as the human kind of financial advisor at lower cost. If you’re paying less in management fees, your returns are higher, your portfolio fatter. That’s the dominant sales pitch. And with the nascent industry growing from $16 billion (USD) under management in 2014 to more than $160 billion today, there’s reason to stop and look at what a Robo-Advisor may do for you.


Financial Giants Muscling Into The Game

As retail investors flock to Robo-Advisors (i.e., software programs using mathematical algorithms to generate investment advice and manage your portfolio), pioneers like Wealthfront and Betterment must now compete against big boys such as Charles Schwab, TD Ameritrade, Vanguard Group, and Fidelity Investments.

And the bandwagon keeps growing. Bank of America activated Merrill Edge Guided Investing earlier this year, Morgan Stanley announced that they’ll be launching Morgan Stanley Access Investing in the fall, 2017, and Goldman Sachs is gearing up to introduce its own Robo-Advisory services.

In Canada, several independent firms (i.e., WealthSimple, QuestTrade Portfolio IQ) offer Robo-advisory services with Bank of Montreal being the only bank having a firm foothold. With momentum and money on the side of robots, it would be surprising if Canada’s other big banks didn’t roll out their own Robo-Advisor in the next year to secure their slice of this particular money pie.


How Does It Work, This Robo-Advisor Thing?

Robo-advisors are a third option for investing; doing it your self and full service financial advisory services being the other two options.

Robo-advisors are convenient (24/7 online access) and more accessible and affordable than hiring a financial advisor (you often need a minimum of $100,000-$250,000 to retain the services of a financial advisor; as for Robo-advisors, some do not require a minimum balance to open an account, others are as low as $500).

Depending on the specific Robo-advisor, they offer different degrees of automation: fully automated or a hybrid set up offering access to old fashioned humans for an additional fee.

Either way, getting started involves you answering some questions about your age, assets, financial goals, risk tolerance, investing time horizon, etc. Moments later, computer algorithms propose a cookie cutter portfolio most suitable to you.

Available investments typically include a range of exchange traded index funds. The software continually monitors your portfolio and periodically buys and sells to maintain your stated risk tolerance and financial goals.


Hype or Substance?

Despite impressive growth of Robo-Advisors in a relatively short period of time, $160 billion is no more than a few drops in a financial industry bucket worth somewhere around $20 Trillion. Still, this niche is expected to continue growing thus more players entering the market.

So … should you bite?

That depends.

  • If you have less than, say, $100,000 for investing, and you want some guidance, then definitely give it a go.
  • If you prefer interfacing with computers rather than humans, again, Robo-Advisors are for you.
  • If you’re currently working with a financial advisor and are not entirely satisfied with the value they bring to the table, then consider opening a Robo-Advisor account to see if it better suits your needs (this may include intangibles other than fees such as guiding you on debt reduction issues, divorce, house purchase, loans, estate planning, and any other financial issues not directly related to investing).

Well, what if your advisor places you in passive funds? They’re still charging you 1 or 2 points. Why pay high fees when an effective Robo-advisor portfolio may be built for less than half the cost?

  • Back to value, let’s give a little more space to fees.

Depending on your robot of choice, we’re talking management fees in the neighborhood of 0.25 – 0.50% for a Robo-Advisor.

Compare this to financial advisors of the human variety who typically charge between 1.0 – 2.0%.

Seems like a small difference in fees? It’s not. Fees matter.

Consider a simple example: your portfolio is worth $500,000. Fees are 2%. Total fees for the year equals $10,000. For simple illustration purposes, if your portfolio remains at $500,000 for 30 years, that’s $300,000 in fees paid. Compare that to 0.5% fees that results in annual fees of $2,500. After 30 years, the final tally is $75,000. Either way, that’s a whole lot of dough toward fees but the 75k is much more palatable than 300k.

Of course, you could slash fees even more by avoiding both humans and robots. Instead, open a discount brokerage account, buy exchange traded index funds, and pay the $5-$10 transaction cost for each buy and sell.

But … what if you’re not the do-it-yourself type when it comes to investments? What if you don’t have the time, knowledge or inclination to manage your investments solo?

Well, then a Robo-advisor would be your next best choice.







Women: Beware Male Financial Advisors

85% of financial advisors are men. Of this 85%, the vast majority fail their female clientele. And this failure is largely two-pronged: first, it’s the result of knuckledragging men working in a testosterone laced environment that doesn’t try to learn, or is biologically incapable of learning, that women approach investing differently than men and; second, for both knuckledraggers and the more evolved males, subconscious negative gender perceptions come into play.

BCG Study Confirms Male Financial Advisors Are Bumblers

The Boston Consulting Group (BCG) is a management consulting firm with more than 60 offices worldwide. A few years back, BCG undertook a Comprehensive Study focused on women’s experience with financial advisors (FA).

The study’s results revealed that women expressed many of the same complaints about FAs as did men, such as: dissatisfaction with communication, quality of advice, lack of tailored solutions, and having to wade through an absurd pile of bureaucracy.

While all that could be fairly anticipated, what raised hairy eyebrows were these additional frustrations voiced by women: a sense of subordination, unequal access to information and deals, inadequate attention, and less favourable financial terms.

And we’re not talking about a few dissatisfied outliers. Nope. What we have here is a majority revolt as borne out by the following unfudged numbers:

  • 73% of women say they’re not satisfied with financial advisory services.
  • 80% of widowed women fire the FA within one year of their husband’s death, then hire a new FA.
  • 87% of women said they could not find a FA with whom they ‘connect’.


It’s All About Relationships

Referring to the above bullet points, let’s deal with issues one and three first.

Annoying, Socially Inept FA

It’s no surprise why the majority of women are annoyed, or downright frustrated, by their FA.

The financial industry trains FAs to think in a detached, analytical manner, with the only item of any consequence being money. And as long as the FA earns money for clients, as long as portfolios perform according to plan, then clients will be happy. Granted, this approach works for most men.

But not so for women. Instead, women take investing proficiency for granted in a FA. After all, it’s their job and the expectation is for the FA to perform well at their job. What matters more is building a trusting relationship, connecting, with the person charged with responsibility for their money.

Unfortunately, too many male FAs have a knack for chipping away at trust, thereby alienating female clients. They do so in a number of ways including:

  • Lack of Respect. Disrespecting women through time honoured patronization and condescension, speaking to female clients as if only a man could do the job and the female client should not bother to ask trivial questions because, surely, investing is beyond a woman’s capacity;
  • Harmful Stereotypes. Stereotyping money management needs according to gender. As if one-size-fits-all women investors. As if all women should be shuttled into low risk securities. As if investment decisions are solely based on social issues, such as sustainable or green investments, rather than considering these issues together with portfolio strategies focused on performance. As if women are not interested in investing. As if women are not the decision-maker where a married couple is involved; and
  • Dishonesty. Being evasive about fees and charging women higher fees than men.

Good Riddance

On to the second issue, 4 out of 5 women fire the FA after hubby checks out of this planet. Kudos to them!

Look, imagine you and your spouse deal with a FA for an extended period of time during which the FA consistently, repeatedly, unfailingly speaks only to hubby regarding investment matters because hubby was marked as the go to guy on all joint accounts as soon as he gave FA a firm, manly handshake and mentioned last nights score in the football game.

And when you try to weigh in, you’re undermined, belittled, treated as if you are an unknowing child. What’s shocking and unfortunate is that the FA stayed in the picture for as long as he did.


So What if Male Financial Advisors Don’t Understand Women?

So … what does it matter that male FAs don’t understand female clients?

Well, in the financial advisory business, the more money you manage, the more money you earn. Because fees are most often generated as a percentage of assets held, the goal is to continually increase the amount of money you manage.

To be clear about this, if you’re a FA, and you manage assets for clients in the neighborhood of $50 million (a successful FA with 5-8 years in the business hits this target), and you charge a 1% fee on assets, that translates to gross earnings of $500,000. A tidy sum.

Still, regardless of how much they earn, a typical FA is always searching for more dough, either to grow their business or to replace clients who have chosen to leave. And if the FA fails to connect with women on the money management front, then he’s seriously denting his earning potential.

Why? Because women now account for 57% of university undergraduates and 59% of graduate school students in the USA, and higher education typically means higher earning power. Because 40% of women earn more money than their husbands. Because more and more women have joined the ranks of senior corporate executives, professionals, and go it alone entrepreneurs, earning larger and larger paychecks. Because the greatest wealth transfer ever is happening now, with trillions of dollars being inherited by Baby Boomers and Gen Xers, and owing to women living longer than men, the bulk of this money eventually ends up under a woman’s full control. Because, today, women control almost $40 Trillion (USD) or 30% of the world’s wealth, and their share of the global money pie is projected to continue growing.

So if you’re a male FA, um, yes, definitely, you want to learn to walk upright to ensure your clientele includes women.


What Women Want, Investment Wise

Here’s the thing: you don’t get to manage the money unless you invest in the client relationship on the clients terms.

This means listening, really listening to the client, trying to understand her concerns, and not thinking you know what is best for her. It means being honest about fees, empathizing with her fears around money, tamping down the standard male bluster, talking a whole lot less about your self, and creating a financial plan that connects the client to her whole life instead of obsessively focusing on making money as an end in itself.

Is Evolution Real?

The way I see it, about half the human population wants to turn the clock back to some illusory golden era, the other half wants to move forward.

If your FA belongs to the delusional pack, and is more comfortable pretending he’s master of the universe, then its time for a switch. Whether married, single, divorced or widowed, fire Mr. Knuckledragger and find your self an emotionally balanced, 21st century FA, whether male or female, someone you can trust, someone who truly cares about you and your financial future.

Of course, for all you BuddhaMoney members, you may recall the blog posted a few months ago about whether or not you should hire a FA or a Robo-Advisor.

If a Robo-Advisor suits you, well then, all these issues I’ve been talking about, they go poof! And you have a pleasant investing experience.

In this regard, for Americans, take a look at ElleVest which is a Robo-Advisor directed to women. I haven’t used the service so I can’t vouch for them, but they’re worth checking out. For Canadians, so sorry, you Canucks are behind the curve on this one as there’s no comparable service offered in Canada just yet.