Like many other professionals, lawyers have specialised wealth management needs which mean that taking professional advice can do wonders for their financial health.
Robo-advisers can be a good low-cost entry point into investing, but there are risks facing the unwary which could really hurt those deploying large sums. Read on to find out if you should be revising robo-advice.
Robo-advisers, automated portfolio construction and management platforms, have proliferated at huge speed in recent years. In many ways this has been a great thing, making diversified investment portfolios available at modest levels of wealth and at low cost, helping competition and access a great deal.
But when we hear of investors placing very large sums with robo-advisers we can’t help but worry. There are certainly big-name firms in this space and the technology is impressive, yet there are several beartraps awaiting those unaware of the full picture on robo-advice.
The first thing investors should bear in mind is that robo-advisers base their “recommendations” on the bare outputs of a risk-profiling questionnaire, with none of the sensitive questioning a human adviser would use to validate your answers and clarify your aims.
Scarily, recent research from Cutter Wealth found that its sample of robo-advisers worldwide achieved only achieved 52% of the possible points for fiduciary responsibility and client suitability – indicating that investment recommendations have been made that may not necessarily fit the client’s best interests and be suitable for their profile and needs.
The best robo-advisers will use very thorough risk-profiling questionnaires and hypothetical scenarios in order to assess clients’ risk appetite but research indicates that there is a long road ahead towards what would be considered best practice among traditional advisers: the strongest robo performer in this category still fall short of three-quarters of the available points. In fact, the research house said “robo-advisers’ average compliance with fiduciary standards is worryingly low”.
Robo-advisers base their “recommendations” on the bare outputs of a risk-profiling questionnaire, with none of the sensitive questioning a human adviser would use to validate your answers and clarify your aims.
Industry figures have long sounded warnings over the ability of robo-advisers – which typically populate portfolios with passive, market-tracking investments like Exchange-Traded Funds – to protect wealth if markets really take a turn for the worse.
The passive sector has benefitted from one of the longest bull markets in history and it remains to be seen how it will perform against active investment managers in less benign market conditions. And, if robo-advisers have wrongly assessed investors’ attitude towards and – crucially – their ability to absorb losses then some people could be quite badly burned by a market downturn they can ill afford. Unfortunately, it seems that some robo-advisers completely neglect to ask questions related for capacity for risk (i.e. to suffer losses), which is very worrying indeed.
Our guide, Understanding your risk-profile and why it’s important provides invaluable guidance on the variables that need to be taken into account. If you feel that you haven’t been adequately assessed on the risk front by any kind of investment provider, it may be well worth while discussing your portfolio with one of the professionals from our panel of wealth managers.
Wealth managers have long held that face-to-face interaction is one of the most vital parts of providing the best service and, while institutions are certainly embracing new technology, great store is still put by meetings and calls with someone who will hopefully become a trusted adviser over time. This, of course, is generally something completely lacking from pure robo-advisers. Although traditional wealth managers increasingly offer robo-advice options, this is very much as an entry point to proper advice or as hybrid services bringing together the best of automation and the human touch.
One of the most important functions an adviser can perform is to tease out an investor’s true attitudes towards investment risk, and how much of it they can truly afford to take on. Another is to encourage them towards the best decisions for their situation and goals; research has shown that while investors are great at telling machines their financial secrets, unsurprisingly they are very poor at taking advice from an algorithm. It is clear that human advisers can fulfil an invaluable wealth “coaching” function in a way a machine simply cannot.
One of the most important functions an adviser can perform is to tease out an investor’s true attitudes towards investment risk, and how much of it they can truly afford to take on
It also goes without saying that a human will be far more instrumental in discouraging poor investment decisions in times of stress. Testing times lie ahead and there are many common behavioural biases investors must avoid in order to preserve their portfolios. While your robo-adviser might offer content aimed at calming your nerves, it’s not the same as discussing your concerns with an expert who knows you well.
Final considerations are tax and diversification. A full -service wealth manager will work to minimise your tax liabilities at the same time as maximising your investment returns, and will also be able to give you exposure to a fully diversified range of asset classes, rather than just a bucket of passives generated via quite a pro forma risk-profiling process.
While there is a lot to like about robo-advisers and they are becoming increasingly sophisticated, there is also a lot to give pause to those investing serious sums – and pots of money intended for serious purposes, like retirement. Robo-advice is doubtlessly inexpensive, but that’s because investors get nothing in the way of personal attention and the personal touch that make wealth managers able to fulfil suitability and fiduciary standards that machines, for the present at least, are not.
While there is a lot to like about robo-advisers and they are becoming increasingly sophisticated, there is also a lot to give pause to those investing serious sums
If you are looking for a cost-efficient way to put a large sum of money to work, there are inexpensive options offered by mainstream wealth managers which will likely fit the bill. Or, if you are already using a robo-adviser and are concerned that your risk appetite and goals haven’t been sufficiently taken into account, then consider discussing your situation with a professional.