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Should you fire your investment advisor for a robot?

A lot has been made of the “Robo-Advisor” as of late. If you’re not aware what a Robo-Advisor is, it’s an automated way to have your portfolio built and managed. To put it simply, an algorithm uses a formula based mainly on your risk and age, and builds a portfolio made up of ETFs for you. The portfolios are cookie-cutter type portfolios and charge around .35 – 1% annual fees.

These Robo firms are becoming so popular that the mammoths like Fidelity deskappleripand Schwab have begun implementing this technology as part of the core strategy. As popularity increases (and assets grow) many Robo firms are marketing the fact that you don’t need an Advisor (real person) because they don’t do anything for you that a robot can’t do . . . and they do it for a whole lot cheaper!

The sad thing is that the Robo firms may be right, it may be advantageous to fire your Advisor and hire a robot. This is especially if you have a sub-par Advisor who doesn’t offer you the kind of services and portfolio management you should expect. As an Independent Advisor, (my partner and I own our business), I take pride in the fact that we give our clients more than most other Advisors at a fraction of the cost (about the same cost as a Robo-Advisor). . . and do things that a Robo-Advisor can’t come close to doing. Some of those things are mentioned below.

So, the question remains, when should someone fire their current Advisor and look for something more and something cheaper?

You should fire your Investment Advisor if . . .

The portfolio the Advisor builds and manage for you is similar to the cookie-cutter portfolios a Robo-Advisor would build. The problem with a lot of Advisors (and this is not a new problem) is that they rely on an academic theory, like Modern Portfolio Theory, to build and manage your portfolio. They take your age, subtract it from 100 and BOOM, just like that, they have your portfolio allocation. (Age 60 – 100 = 40% in stocks and 60% in bonds). Every time I see this type of portfolio from clients who transfer their accounts to us, my stomach turns. I truly feel bad for the client because they are most likely being charged 2 – 3% annually for this type of cookie-cutter management. If this type of portfolio management is the only thing your Investment Advisor is doing for you . . . fire them, hire a robot.

They lack sophistication. This is closely aligned with the cookie-cutter approach just mentioned. By sophistication I’m referring to the following examples . . .

  1. The ability to pick good stocks. Some Advisors are just plain good stock pickers. It’s getting harder and harder to find those Advisors (because most go with the cookie-cutter approach), but they are out there. Those stock picking Advisors provide clients the opportunity to really outperform the market over a given period of time, if they are right. (Note, this strategy does carry more risk than the plain cookie cutter approach but where more reward exists, more risk exists as well.)
  2. Alternative strategies for finding income in a market of zero percent interest rates. Do they rely on theories (Modern Portfolio Theory) to the point where they take too much risk in products that provide very little return? Or do they search for private equity type investments or option strategies that will provide the income they need and desire with less risk?
    The ability to make money on strategies during bear market periods (like 2008). Do they short stocks or do they utilize derivatives like options to protect or make money when the market and stocks are falling?
  3. The ability to make money on strategies during bear market periods (like 2008). Do they short stocks or do they utilize derivatives like options to protect or make money when the market and stocks are falling?
  4. Additional risk management techniques other than just pure allocation (ala Modern Portfolio Theory). Is there a time, especially for those in or on the cusp of retirement, which they would actually go into cash? In 2008 all assets were hammered delaying retirement for thousands of people.

If the answer is no to these questions that doesn’t immediately mean you should fire your advisor for a robot. A robot will not provide those services either. The more important question you should be asking is whether or not you would like any of those services. If the answer is no, fire your Advisor and hire a robot. If the answer is yes, fire your Advisor and find a new Advisor.

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A cookie-cutter approach may not be right for everyone. People have different goals, challenges, and just live different lives.

They are not 100% transparent. If you can’t answer this question “how much does your Investment Advisor charge you?” in under 10 seconds, you should fire your advisor. Typically these Robo-Advisor firms will charge an annual fee based on how much money you have with them. It’s pretty simple. If it’s a 1% fee and you have $50,000 with them, you will pay $500 per year for them to manage your portfolio. The days of charging outrageous fees are over. If you don’t know how much you’re being charged, find out. Then once you know if it’s more than 1.5% . . . fire them, hire a robot.

They don’t add value worthy of the fee charged. Most Advisors will argue that they provide value worthy of the fee . . . as most Advisors truly believe that they do! This question is not for the Advisor to answer, this is for the client, you, to answer. Some of this “value” I’m speaking of has already been mentioned in this article. I’m talking about sophistication as well as portfolio management that truly does add value beyond a cookie-cutter approach. As a client you determine the value of the Advisor based on the outcome that has come as a result.

Overall returns (are they better than the market allowing your portfolio to really grow?), risk reduction (are they preserving your capital?) are just a few of those outcomes you should consider. Additional value might also come in the form of tax assistance, 401(k) plan for small business owners and/or investor education that coincides with the money management. If you don’t know what kind of value your advisor is providing and do not want that type of value, fire your advisor and hire a robot. If you want that type of value then fire your advisor and find someone that offers that kind of value.

looking-forward-chalkIn summary, as an Advisor I really appreciate the role that the Robo-Advisor firms are beginning to play in the industry. They are providing a service that most real life Advisors have been implementing for decades and they do it for a sliver of the cost. It’s a great time for people to invest, Modern Portfolio Theory style, and pay a minimal amount to do so.
I also believe in the next five – 10 years the Robo-Advisor is going to put a lot of Advisors out of business. If Advisors don’t offer anything better than what a robot offers, they should be put out of business . . . and frankly speaking, they should!

I am certainly looking forward to those next five – 10 years as those Advisors that offer more than a cookie-cutter approach,  those that provide sophisticated alternatives to portfolio management, and those that are 100% transparent in everything they do . . . those are the firms that are going to blossom, deservedly so.

I would be more than happy to discuss why I believe Iron Gate Global Advisors stands at the front of the line in providing those services that you are entitled to for a low fee. Just click here to request more information on our firm and choose if you would like to be contacted directly. Please understand that this comes without strings attached, I’d be more than happy to just talk about where you are and what you may need moving forward.

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