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Algorithms run our lives. For better or worse, they undergird most of modern society. In some ways, it’s great — they can get us the right information at exactly the right time, surface a new video creator we might not have found ourselves, recommend a new band that's adjacent to what we like... you get the picture. But should they run your retirement investing? You could certainly do worse than a robo-advisor... but we also believe you could do much better.
Let us explain.
The Rise of Robo-Advisors
Robo-advisors have gained popularity for their low-cost, algorithm-driven financial planning. They promise convenience and efficiency, often appealing to tech-savvy and budget-conscious investors. Assets under management by robo-advisors are currently north of $330B — it’s certainly not a fad.
However, these digital platforms come with limitations, particularly when planning for something as crucial and personal as retirement. Here’s why we think partnering with a financial advisor remains the better option for most folks:
Personalized Advice vs. One-Size-Fits-All
Retirement planning is not just about crunching numbers; it’s about crafting a comprehensive strategy tailored to your unique goals, risk tolerance, and life circumstances. While robo-advisors can usually manage standard portfolios relatively efficiently, they lack the ability to adapt to complex life changes and nuanced financial needs.
Financial advisors offer personalized guidance that robo-advisors simply can't match. They bring a deep understanding of market trends, tax implications, and estate planning — critical components that not only require a nuanced approach, but also a holistic view of your entire financial picture (most robo-advisors don’t have the capability to plan and execute on all of those financial fronts).
A financial advisor can provide insights and strategies that align with your evolving financial landscape, ensuring that your retirement plan adapts as your life and goals change.
Navigating Emotional and Market Turbulence
It’s worth noting that investing isn’t just a rational exercise; it’s also deeply emotional, especially during market volatility (hard as we may try to dispel that emotion in our clients, haha). The 2020 market downturn underscored this reality; investors needed reassurance and a steady hand to guide them through turbulent times — something a robo-advisor can't offer.
Seasoned advisors serve as a calming influence, helping clients maintain perspective and avoid rash decisions that could derail their retirement plans. A study by Vanguard suggested that behavioral coaching provided by financial advisors can add about 1.5% in net returns annually, underscoring the value of emotional guidance and disciplined decision-making.
Based on a Vanguard study of actual client behavior, we found that investors who deviated from their initial retirement fund investment trailed the target-date fund benchmark by 150 bps. This suggests that the discipline and guidance that an advisor might provide through behavioral coaching could be the largest potential value-add of the tools available to advisors.
The Cost Factor: Understanding Value
One of the main selling points of robo-advisors is their low cost. However, it's essential to weigh the cost against the value received. While robo-advisors often charge lower fees, they also offer a more limited range of services and personalization. Financial advisors, on the other hand, may provide value that often far exceeds their fees, particularly when it comes to optimizing tax strategies, navigating life changes, and ensuring emotional discipline during market fluctuations.
According to a study by Russell Investments, a financial advisor’s counsel on tax-efficient investment strategies alone can increase an investor's annual returns by up to 1.2%. This is a clear testament to the value that seasoned financial professionals bring to the table.
The average annual tax drag for the five years ending Dec. 31, 2021, was significant. Investors in non-tax-managed U.S. equity products (active, passive and ETFs) lost, on average, 2.14% of their return to taxes. Those in tax-managed U.S. equity funds forfeited only 0.92%. With taxable investors holding $11.2 trillion of the $23.9 trillion invested in open-end mutual funds, this is a massive concern — and a massive opportunity for added value.
The Human Touch Matters
The convenience of technology will obviously continue to play a role in financial management. In our estimation, robo-advisors are a net positive overall — they provide a one-size-fits-some investing solution at an affordable fee structure. However, when it comes to something as personal and significant as retirement planning, there is no substitute for the expertise and personalized service of a seasoned financial advisor.
The advisors we work with (and obviously, the work we do for clients directly) are far stronger holistic partners to their clientsinvestors than robo-advisors. That’s because your financial future shouldn't just be choosing an equity portfolio off a limited menu… it should be built around a personalized, custom investing solution that adapts as your life and goals change.
At City Different Investments, we are committed to providing the guidance and comprehensive services that empower you to achieve your financial goals. Our approach is not just about managing your investments but about being a trusted partner in your financial journey. For more information on our services and strategies, get in touch — we love to talk shop.
IMPORTANT DISCLOSURES
The information contained in this communication has been designed for general informational, illustrative, and educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security. Moreover, the information provided is not intended to provide any investment advice whatsoever. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.
The presented information and statistics have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or forecasts discussed herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please keep in mind that past performance may not be indicative of future results.