Note: This article is courtesy of Iris.xyz
By Joseph Hosler
Robo-only advisors have recently been very successful at raising new capital and focusing their resources on winning over millennials. Therefore, we find it timely to discuss the client’s historical need of a financial adviser.
While the understanding of clients’ risk tolerances that robo-only advisors provide is undoubtedly an important part of investing, it remains only part of the picture. Of equal importance is taking into account the risk tolerance of investment markets and how this may impact the client’s financial profile. Regardless of how much risk a person can afford to take, no one wants to enter an unstable market environment only to discover that he or she did not adequately account for his or her entire financial situation.
The Singularity of the Individual
Robo-only advisors can judge a client’s risk tolerance very accurately if the client understands his or her goals, priorities, and situation very well. But how often is this truly the case? Clients often require more complex guidance as they crystallize their aims. A robo-only advisor is incapable of providing this type of guidance. It is not a stretch to believe that the narrow range of environments in which robo-only advisors excel will be a mitigating factor of their success.
It is understood that robo-only advisers are built by very intelligent people, but it appears that these engineers have forgotten the informal definition of an engineer: Someone who performs precision guesswork based on unreliable data provided by those of questionable knowledge. In their present structure, robo-only advisors are not equipped to blend the client’s risk with market risk, both of which are dynamic. Because of this, there is ample reason to think they will have issues maintaining the trust of their user base.