‘Hybrid’ Approach To Robo Investing Models a Winner

Investors who rely on “robo-only” investment models are making a big mistake, a financial advisor tells InsuranceNews.Net.

The problem is that algorithms are based on past and current economic and financial data to ensure a safe course of action for clients who might be wary of investing on their own, experts say.

A better approach? Merging that robo model with real-world financial advisor analysis, said Dan McElwee, executive vice president of Ventura Wealth Management in Ewing, N.J.

“It’s foolish to rely solely on advice created by a formula,” he said. “The best use of robo platforms is when you pair it with commentary from a certified financial planner.”

McElwee provides three specific reasons why that’s the case:

Robo advice assumes that the past is destined to repeat itself.

“We know that markets, investors, and geopolitics are always evolving,” McElwee said. “A financial planner and active portfolio manager can help mitigate risk by adapting to current trends and investor changing needs.”

People make bad financial decisions when they are under financial stress.

“While algorithmic systems portray an amount of ‘certainty,’ they do not necessary have the ability to soothe a client’s nerves when financial issues present themselves,” he added. “Having someone to talk to, and from whom to receive active financial advice, can help an individual or family make better decisions in the long run.”

Questions, questions, questions.

Robo advisors build financial profiles of clients based on a set of questions designed to reveal how a client thinks about risk, return, and financial planning.

“An advisor actively listens and may distinguish hesitation and ask a supplemental question, illuminating potential conflicts in a client’s reasoning,” McElwee said.

McElwee isn’t the only industry insider who believes a “combination” investment advice approach best serves clients.

“We think combining robotics and human advice is more critical than ever,” said Jonathan Monjazi, founder and chief executive officer of CEO Based Investing in San Diego. “Metrics, algorithms, and software programs make providing investment advice and products easier and simpler for the client. Robotics coupled with an adviser who can understand a client's intentions, point of view, and concerns can result in better solutions.”

Strategically, there are “plenty of opportunities” to merge robo-investment advice with
traditional human-generated advice, said Gregory J. Kurinec, a financial planner with
Bentron Financial Group in Naperville, Ill.

“The first step is to find a robo platform that fits the advisor's investment philosophy,” he said. “If a client approaches an advisor and shares the same investment philosophy, but does not want or need any additional financial planning advice, then they are a
perfect fit for an investment-only platform.”

However, if a client is in need of more traditional advice with frequent access to an advisor, then human-generated advice is a better fit, he added.

“The key to offering both strategies is to make it clear to the client which side of the fence they are on,” Kurinec said. “Let them choose which works best for them.”

It’s also important to show clients they’re never stuck on either side of that investment advisory fence.

“Generally, a new financial planning relationship has a lot of upfront work by both parties,” Kurinec added. “If, after a few years, the work has dropped off significantly, the client may opt for the less-intense, lower-cost model.”

The opposite may be true as well, he said. If a client on the robo platform has had a significant life event that will require a more in-depth analysis of their financial situation, it may be more appropriate to move them to a more traditional relationship.

'More Efficient Practice'

Others believe it’s not an either/or proposition – especially millennial-age advisors.

“Younger advisors like myself are using ‘robo’ tools to provide for a more efficient practice where costs are lowered and efficiency increased due to automation,” explained Genti Cici, a money manager at StandUP Advisors.

Cici uses robo-based Betterment for his portfolio advisory needs.

The human model provides much-needed time to discuss issues with clients that a software program cannot explain, Cici said, such as what/how to start saving and how to stay the course when the market turns.

“It’s really the best of both worlds, where the robo option offers tools that do repetitive/math tasks at a much faster rate, for lower cost and with less mistakes than the human advisors,” he said. “The human part aids talking to clients, explaining things, and dealing with the emotional aspect of investing and saving for the future.”

It seems some form of advice maximizing the strengths of both options represents the winning investment formula.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]