Our affluent users have seen that the government is set to both give and take away on the tax front. Media coverage of the growing pension transfer scandal has also driven a significant number of enquiries in recent weeks.
The rise of robo-advisors has helped many start investing, but those relying solely on automated systems need to remember the parallels presented by the medical world, explains Lee Goggin, Co-Founder of findaWEALTHMANAGER.com.
The internet has democratised access to information and services hugely, empowering people in every area of their lives – including investing, by virtue of low-cost options like DIY investment platforms and now so-called robo-advisors. Anything that encourages a saving and investing culture and gives people an inexpensive way in has got to be a good thing, yet there are some interesting parallels with medicine here which underscore why automated advice is unlikely to be doing enough for the health of your wealth in the longer term.
As any GP will tell you, in many ways the internet is the bane of medical practitioners’ lives, with patients self-diagnosing from the internet and being generally far less likely to simply accept that “Doctor knows best”. Yet on the flipside, it is certainly a great thing that people can now make more informed decisions about their health and easily research their ills online if they so choose. If a search engine throws up pertinent information that helps your discussion with a medical professional along then all to the good; it is unfortunately common however that Googling your symptoms just leads to a panic or making ill-informed decisions based on inadequate information. The worries – and dangers – are clear.
The pros and cons of taking automated investment advice rather than working with a professional wealth manager are similar in several ways.
Wealth management fees can come in for criticism compared to the (often, but not always) very low charges levied by robo-advisors. Investors who have what they believe to be pretty “standard” wealth management needs are often led to think that by going to a traditional wealth manager they won’t be getting very much more for their money; that the investment portfolio generated by an automated system will perfectly serve all their needs. Yet really taking care of the health of your wealth is about far more than simple portfolio construction and cookie-cutter models. Like maintaining your bodily health, growing and protecting your wealth has to be a holistic affair.
While the diagnostic capabilities provided by robo-advisors can be quite good, in terms of assessing investors’ needs and prescribing appropriate investments, investors will invariably get better outcomes from talking to a highly-skilled professional. It is only too easy for self-directed investors to overestimate their risk tolerance when taking a tick-box test; indeed, according to our client research, 85% of investors have taken on too much risk in their portfolios.
In contrast, a wealth manager will use your test results as merely a jumping-off point for discussion, teasing out your true attitudes with questioning skills honed over many years and looking at your financial goals in the round.
Just as a doctor will bring lifestyle factors and your family history into the conversation, a wealth manager will take a 360-degree view of your finances to bring in wealth planning and tax mitigation elements to secure the best results. And, just like the best personal physicians of old, a well-matched wealth manager is likely to become a key trusted advisor over the years. Having a human being on hand to give reassurance when markets take a turn for the worse (as they often do) is vital to many investors’ peace of mind. A robo-advisor may provide reams of generalist investment research, but it will not be able to answer the crucial question “What does all this mean for me and my goals?”
Automated advice systems might well be very advanced and some doubtless have very powerful algorithms powering their investment strategies. Yet no matter how clever these systems may be, they still (at least not yet) don’t represent true intelligence – let alone the kind of insight required to maximise the growth of your capital and then to defend it long term against a broad range of possible threats.
Automated advice can be a great entry point into investing, but the factors affecting your financial well-being are likely to be too complex for you to rely on the ministrations of a robo-advisor alone. With wealth, as with health, a reductionist approach is not enough.
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