Wealth Management in a Digital World

Subtopic: Hess Winery Air Date: June 4th, 2020

We’re playing our version of MythBusters. This is the beginning of a series on Financial Planning and Wealth Management in a Digital World (AKA- Robo Advisors) and why they’ll never take our place. Are we biased? Yes and rightfully so.

What is a Robo Advisor?

They first started popping up in 2008 during the financial crisis. Minimal human interaction. Based on algorithms. These companies use Nobel Prize-winning research to develop their processes.

One of the more well-known names you’ll come across in the industry is Betterment. Based on AUM, they are the leader. It’s all about a lack of human interaction-removing emotion. But trusting a retirement account to an algorithm? I’d prefer not. And they are not as low cost as the media hypes. Some ROBO’s charge nearly 1% and that does not include the fund expenses.

Does it have its place?

I think it’s a great way to start investing in your teens and twenties. Let’s be serious, most advisors of substance have pretty strict minimums. However, once you’re into your earning years and require planning? It’s probably time to adjust. Once you get into the details of these companies you’ll find in the fine print that advisors are available for a “premium”. The fact is, ROBO is not going away, nor is financial complexity. The goal of our series is twofold:

  • Illuminating the blind spots of ROBO investing
  • And share some of the many areas that can only be solved with human interaction.

Retirement plans

All of us who have worked in this industry or have retirement accounts understand how complex saving for retirement can be. There are so many avenues to take so that you maximize your savings. Most of those avenues are taken following the advice of a coordinated effort between your CPA & advisor. Not sure that Robo’s have those type conversations but I am happy to be proven wrong.

Traditional vs Roth decision making. Many of the plans we implement carry a Roth option on the plan. And many clients and participants come to us confused and uncertain about which is the best route for them to take. Many times there’s the issue of income vs eligibility and the Backdoor Roth. Not that one is the most popular question.

Does it fit in some cases?

Yes. But, one size doesn’t fit all. Cliché? Yes. True? Absolutely. This is a prime example of recommendations being developed based on conversations with our clients – asking questions that computers are not likely going to “think about”.

Shout out to the business owners we work with. They can attest to the time it takes to develop the right plan for their business and its employees. Beyond implementation, our team works closely with those participants, too. Coaching and education are paramount – their participation depends on the confidence we build. It’s proven that participation equates to engagement. Employees see this as a benefit, and in a world of fewer benefits, that is important.

I want to point out that part of our job is counseling clients – psychologically, we help them control emotions. Nothing creates greater emotion than finances. Because of this, we don’t believe you will ever be able to remove the human interaction of wealth management. Many people value the fact that their advisors take the time to understand their sentiment to money/finances etc. We get to know our clients on such a personal level so that our recommendations make sense for their situation, and match their goals.

How many IRA or 401k accounts do you have scattered among multiple custodians or advisors? When participants change employers, it is very common to leave their 401k behind. How many logins can one client have? Believe me, that number can be excessive. We recently onboarded a client with 7 old retirement plans. A downside is, of course, it’s scattered, and this makes it nearly impossible to have your investment goals being managed as a “whole”. Another potential problem could be the absence of stretch provisions, something that is not common in older plans.

Stretch provisions allow a beneficiary to take the funds over an extended amount of time in comparison to a lump sum. The lump-sum could create some serious tax consequences for your beneficiaries.