What robo advisers miss for investors

Will robo-advisers fully replace human financial advisers, because they’re cheaper and more efficient?

No way. And those who think so misunderstand what financial advisers do.

“My clients pay me for advice, a holistic financial and retirement plan,” as well as referrals to experts in trust and estate planning, said Michael Kitces, who runs a financial planning firm and follows the robo-adviser field.

He’s a huge fan of robos, which offer automated portfolio management, as well as automatic saving and investing and cutting-edge adviser software.

“But, sadly, the robo advisers didn’t understand the landscape they’re competing with when they walked in. The investing site Betterment.com “and the like thought all advisers were mediocre, or at least all the same. And they’re not.”

Still, the rise of robo-advisers prompted many tech-savvy human financial advisers to sharpen their game.

The term robo-adviser is slang for low-cost, internet-only money managers that automate investing with few or no humans involved and offer extras such as tax-loss harvesting. Fees can range anywhere from zero (at Schwab, the robo-advisers are free, but you must have a minimum amount of cash on hand) up to 1 percent or more a year.

Robo-advisers often use passive index funds but can also pick stocks and bonds.

Until robo-advisers came on the scene, “none of us financial advisers appreciated how bad our technology was, because we were all comparing ourselves to everyone else’s similarly bad tools. The robo-advisers provided a new point of comparison, and it was very embarrassing for everyone,” Kitces said.

Robo-advised assets have grown more sharply among the Wall Street traditional firms compared with the start-ups: Vanguard now robo-advises $31 billion; Schwab $5.3 billion, Betterment $3.3 billion, Wealthfront $2.8 billion, and Personal Capital $1.8 billion, according to Joe Mansueto, CEO of Morningstar.

But robo-advisers as a trend may be peaking: The pace of new asset in-flows has remained relatively flat at start-ups Betterment and Wealthfront since the end of 2014.

Based on the latest Form ADV disclosures these firms file with regulators, the pace of asset growth at Betterment is about $150 million a month, flat versus a year ago, and growth at Wealthfront is down to $60 million a month over the last six months, Kitces estimates.

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