Why Millennials Should Think About Using Robo-Advisors to Get Started
This week's article comes from Josh Wilson - founder of Family Faith Finance
By Josh Wilson, a Millennial who is working to save more money than the guy next door. Just kidding... but actually Josh loves saving and planning for the future with his beautiful wife.
It is now well established that millennials don’t trust the financial establishment. Many lost trust after watching their parents suffer through the financial crisis and what it did to their 401(k) plans or their home values. Others simply don’t see the value in paying a financial advisor to give them advice or manage their money. Much of what the financial services industry has to offer can be obtained online. Millennials are fully capable of finding the information they need on the Internet. More importantly, they find what they need, when they need it and they can get it how they want it. Traditional means of dispensing advice or managing money seem outdated and untrustworthy to tech-savvy millennials. So, from their perspective, the less they have to do with the traditional financial services industry, the better.
Millennials Want Financial Advice Their Way
However, from the perspective of traditional financial advisors, the feeling is mutual. To a great extent millennials are not a main target of many advisors because they don’t yet have significant assets. That will prove to be a huge mistake when the millennial generation gets ready to inherit as much as $30 trillion in the Great Wealth Transfer starting in about 20 years. Make no mistake, millennials do want to receive financial advice; they just want to receive it on their own terms and they don’t want to enrich some financial advisor whom they don’t trust in the process. That’s where robo-advisors come in.
What Exactly is a Robo-Advisor?
Robo-advisors are a fairly new innovation spawned by the emerging fintech industry. Fintech is the merging of financial services with technology to create large scale financial solutions that can be utilized by anyone carrying a mobile device. It also incorporates complex algorithmic formulas to perform financial functions at a superhuman level. It has given robo-advisors, which only exist online, the capacity to analyze a person’s financial objectives and risk tolerance to generate an investment strategy and then help the person monitor and rebalance his investments to help keep them stay on track to meeting his goals. The robo-advisor will even recommend specific, low cost investment vehicles such as exchange-traded funds and index funds.
Big Advice for a Small Fee
All of this is done for a relatively small fee of 0.50% or less of the assets under management. That compares very favorably to the 1.0% or more charged be fee-based advisors and much more favorably to the management fees charged by mutual funds, which can run as high as 3.0%. The robo-advisors charge less because they rely on technology rather than pricey humans to guide their clients. It’s a huge winner for millennials who can get the advice they need without having to interact with a human.
Even if they wanted to work with a traditional financial advisor, millennials can’t have access due to the high barriers to entry. The best financial advisors tend to have very high minimums of $1 million or more. Less experienced advisors might only require $250,000, but that might be the upper range of what a millennial has to invest. Most robo-advisors have low or sometimes no minimums. Yet, because of the scale create by robo-technology, the quality of investment advice is as good as that given to a multi-million dollar account.
The Limits to Robo-Advice
Robo-advisors are ideal for dispensing investment advice and creating portfolios for millennials who only need to focus on saving and investing. However, when life begins to get more complicated, such as starting a family, robo-advisors lack the means to offer advice on issues other than investments. For instance, when tax-related or insurance issues arise, you will have to seek advice from another professional. Also, robo-advisors lack the human element necessary to guide investors through turbulent events such as stock market crashes or a deep recession. Robo-advisors came of age after the last major crisis, so not a lot is known about how they will perform during the next crisis.
The Perfect Blend of Digital and Human Advice
Some of the most popular robo-advisors, such as Betterment, Wealthfront, and Vanguard offer access to live advisors who work on a salary. Users can get their investment planning advice digitally, but they can commiserate with an objective, human advisor on specific questions or decisions. It’s not unlike young people who use a Fitbit device for their daily training regimen, but then meet with their trainer weekly to go over their progress and make adjustments to their routine. It’s the ideal blend of technology and limited human interaction millennials prefer.
Automated Advice Plus Automated Savings
The biggest challenge for young investors is finding a way to set aside the money to invest. Millennials are particularly good about setting money aside in their 401(k) plans because they use automatic deductions. Robo-advisors are now equipped to link to their users’ bank accounts so they can set up a systematic investment. Automated investment management combined with automated savings is a recipe for long-term investing success.
Disclaimer: All of the above information represents the opinion of the author - it should not be used as investment advice. Please speak with a licensed representative when making any investment decision. Steps have been taken to ensure external articles have reliable information but such may not always be the case. All information is presented without warranty and express the views of the author alone.
Thumbnail Image: Hillard Lyons