Could this be the golden age of the mobile app? Maybe. Only time will tell. What is clear is that mobile application software (“app”) is transforming everything from how we reserve a table at our favorite restaurant to how we track our activity, sleep, health and much, much more. Financial services like banking, personal finance (e.g., budgeting, bill-paying), and investment management, are participating in big ways in the mobile revolution.
To that end, automated investment platforms called robo-advisors are proliferating rapidly. Nearly all major brokerage firms, mutual fund companies, and even some banks have an up-and-running robo-advisor solution for their customers. They have intuitively appealing names like “Intelligent Portfolios” etc., and they use a simple algorithm to automatically re-balance portfolios back to a fixed asset allocation determined by each user. In a nutshell, robo-advisors are an automatic, set-it and forget-it, mobile investment technology aimed at the mass market.
At MCM, we are vocal advocates of any new technologies or developments that encourage consumers to save and invest intelligently, including robo’s. If you think a robo-advisor might be a good option for you, by all means, give it a try. Be sure to consider the following as you do your due diligence:
- Robo’s do not appeal equally across all consumer wealth brackets. They are most popular with tech savvy, cost conscious millennial investors with comparatively small, uncomplicated portfolios. MCM has a very successful Growing Investor Program specifically designed to address the needs of these investors.
High(er) and ultra-high earners with more investment dollars at risk and more complex investment portfolios favor human investment experts utilizing the latest investment technologies by wide margins.
- Robo’s pitch themselves as no-fee which is not the same as no-cost. Nobody works for free, right? Especially Wall Street banks and brokers. The “no-fee” claim means that the cost(s) to the user is implied, or hidden, so the user doesn’t see it and never writes a check for it. For example, some robo’s require that a large cash balance be maintained in the portfolio at all times. The cash can’t be invested and no material rate-of-return can be earned on it. The robo provider gets the free use of this cash at the investors’ expense; like an interest-free loan. Alternatively, the robo provider may also be paid via a backdoor by a third-party mutual fund company to put their mutual funds into your portfolio. The mutual fund company gets that money back from the investor by way of the annual expense ratio levied by the fund (another implied cost!).
- Tax-loss harvesting may or may not happen in your portfolio. Robo’s typically tout tax-loss harvesting as a primary benefit of the program. Make sure you qualify! In some cases, tax-loss harvesting is limited to portfolios greater than $50,000 and then only after the investor has self-enrolled in the service.
- Be sure to read the disclosures. The fine print is lengthy and discloses, among other things, that the diversification and re-balancing strategies of the robo technology does not ensure profits and does not protect against losses in declining markets. If you’re after a magic investment performance bullet, a robo isn’t it.
Robo-advisors are probably here to stay for at least one or two segments of the investing public. On balance, that’s a good thing, but only if they’re understood thoroughly and utilized properly. Like many other things, if they’re poorly understood and misused, that could result in real harm. Remember interest-only subprime mortgages? We all know how that worked out.
Off Wall Street 