How safe would you feel if you buckled your seatbelt on an airplane and heard the following announcement?
Good morning, ladies and gentlemen. My name is Angel, and I’m your chief flight attendant. Welcome aboard Economy Air Lines Flight 7734 from New York to Dallas. You’ll be pleased to know that our captain, Buzz Nerdly, is one of our most senior drone pilots. He’ll be guiding us safely to Dallas from his command station in a cinderblock building in Olathe, Kansas.
While the computer will handle all facets of our flight, Captain Buzz is on standby. In the unlikely event of a problem, the computer will self-diagnose, then email the Captain instructions on what to do next. Please sit back, relax, and enjoy your flight.
Angel had better be careful. A slew of passengers, myself included, would trample her on the way out the door. Sure, we all appreciate that computers and high-tech instruments are available to help pilots fly. But no one is ready for a captain to abdicate all of his responsibilities.
Yet when it comes to their nest eggs, many investors are handing over the controls to a computer. A recent Forbes article made investing with a robo advisor sound as effortless as kicking back with a cold one to watch the game:
Automated investment services promise to make investing easy, inexpensive, and even fun. Sometimes called robo advisors, these companies can take the pain and uncertainty out of investing by constructing a portfolio, investing in ETFs, rebalancing, reinvesting dividends, and even harvesting tax losses.
Apparently the author hasn’t seen 2001: A Space Odyssey. What could possibly go haywire?
Don’t get me wrong. Financial advisors have used sophisticated computer programs like this for years. They can be incredibly useful. And truth be told, bottom-level advisors don’t do much more than recite what the computer spits out. You’ll get a handshake, a warm smile, and maybe a free pen, but little if any customized advice.
Still, most people don’t have the millions it takes to hire a private banker or to meet the minimums of many financial planners. But they still want to protect and maximize what they have. We all do.
Enter the robo advisor.
Robo advisors offer a do-it-yourself, one-size-fits-all approach for the average Joe. They provide low-cost access to the same tools financial advisors use.
But be forewarned: you’re getting all the horsepower, but no guidance on how to drive the machine.