ROBO-Advisors Invade Retirement Planning: Hurray!
Robots have become a certainty for our future
They lower the cost of almost every sector of American Industry. The chart below shows us how the value of robots has dropped as the cost of human workers have increased.
One sector gaining an enormous foothold for robots is the financial guidance industry: ROBO-Advisors.
Have you noticed that fees on specific ETFs (Electronically Traded Funds) have dropped significantly? Schwab and Co. recently announced the lowering of fees on many asset sectors, generally those associated with Money Markets and Indices. Now, Schwab, Vanguard, and Fidelity are offering ETFs with such low management fees that it becomes hard to understand how there can be any remaining profit for their efforts.
Also, many larger brokerage companies are offering ROBO-Advisors for some clients in some categories. This offer eliminates the need for a financial advisor. Not only are large brokerages offing the ROBO but so are many digital-only companies, such as Betterment (and others). Their plan is simple, an algorithm based on the addition of specific facts can provide better financial guidance than can a human.
Did you notice the words I used? Financial Guidance. There is a big difference between financial guidance and financial advice.
Guidance is not advice. Guidance is a pre-written approach to specific goals based on specific facts. It is not advice; it is a roadmap only. The factors governing changes are based on outside interference and the evolving time horizon and needs of the actual owner of the funds. Many think a ROBO-Advisor can direct almost anyone in almost any situation down this path to the goal.
Did you get what is missing here? The part that is missing is the category ROBO-Advisors use, indices. They readjust their algorithm based on a significant amount of data, data obtained from an Index such as the Standard and Poor’s Stock Index 500 (S&P 500)
If you use their approach, you have leveled out your risk because you have broadened your market exposure. Instead of using individual stocks (or groups of stocks) you have purchased the entire (almost) market. The customization comes in the algorithm. As an example, if you are 40, you have enough time to recover from any serious market correction (their words, not mine. But if you are 60, exposure to volatility can become a significant issue. ROBO-Advisors build that factor r into their guidance, as we age, we reduce exposure to market loss.
This is not guidance; this is entirely common sense. All the ROBO-Advisor has done is make retirement planning free of any human experience. The fund owner has isolated himself from any human interference, and they are only dealing with the algorithm. Is this bad? My answer is yes, it removes a critical category from the retirement planning equation.
It has completely removed any product that is sold as a contract. ROBO-Advisors offer guidance based on indices, by doing so, they have entirely overlooked any product that is sold as a contract. These contracts can do far more than any ROBO-Advisor can do, they can customize a retirement plan based on contractual guarantees.
The contract products I am speaking of is Annuities.
I think the best thing that could happen to our industry is an enormous and robust growth from the ROBO-Advisor sector. The more and more people opting for this level of advice and removing themselves from the personal relationship with a broker sets up the most massive pool of prospects for us than ever in the history of annuities.
What sounded so beautiful and so perfect will sour; will turn as the users of ROBO-Advisors ages, they will desperately need a product with no market risk and that have the one underlying benefits no one else has: Lifetime Income.
The absolute KEY to retirement planning is how the funds will be used when the planned time for retirement comes. No longer will yield be significant, what will be important is the one thing our product offers: Safety, security, freedom from worry and stress, freedom from market risk and Income that can never be outlived.
Hurrah for the ROBO-Advisors, may they live long and prosper.