Ep3: Man vs. Machine
January 22, 2019
About This Episode
In this episode, Patti Brennan and Brad Everett discuss the pros and cons of robo-advising and using online financial calculators. There are many pros and cons to using these online tools – so why and maybe more importantly, when, is it the right time to seek out a professional? Patti and Brad use their years of experience, combined with real life examples, to help answer these questions.
Patti Brennan: In this episode, we’re talking robo‑advisors versus human advisors. What are the pros and cons of each one? Let’s just really look at it down the line. With me today, I have Brad Everett. He’s our chief investment officer.
Brad, what do you think about this subject, robo‑advisors versus human advisors?
Brad Everett: There’s certainly a valid case for each. Maybe, I wouldn’t think of a robo‑advisor as a full advisor. They can be great for single‑goal projects, things like that. If you were 22 years old and you want to retire in 40 years, I don’t doubt that a robo‑advisor can give you a great allocation.
Your job at that point, at that point in your life, is to save as much money as you can and be aggressive. I don’t think that a robo‑advisor would have trouble guiding you to that goal. From there as you get older and you start to have competing goals, goals that, maybe, you should go in one order or another, accomplish this before you do this.
If you do this, you might not be able to do this anymore. That would probably require a human advisor that can help you prioritize those things, help you see which ones might conflict with the others.
Patti: It’s like to your point, when people are first starting out, the most important thing is just start doing something.
Brad: Just participate.
Patti: Just participate. Get in there. You don’t necessarily have to over‑complicate things. I think that sometimes can negatively affect people, where it gets so overwhelming. Just start with something. We often use the Starbucks example when we’re talking with young people.
The old, if you avoid going into Starbucks every day, saving that $5.48 a day, that adds up to about $2,000 a year. If you invest that money at about eight percent, that person who just decided to make coffee at home that morning will have $675,000 more money than the person who stopped at Starbucks.
Those little things can add up to a lot, and it can make a big difference. To your point, you don’t necessarily need a human being there all the time watching and making sure that you’re not stopping and that you’re actually saving that money.
Once you get the discipline, and you get started, and you get in the habit of putting that money away every month, you just get used to it. You want to do it. It feels uncomfortable when you’re not seeing that account growing.
Brad: You’re not going to want to stop. I guess the other side of that too is that you will probably find that your life is getting complicated far sooner than you thought. Your life is really only simple for how many years out of college before you have a kid and a marriage.
You’re trying to then debate whether you fund a 529 Plan, or pay off your own college debt, or save for your own retirement, or buy your own car, or finally get off your parent’s cellphone plan. Those complicating goals show up relatively early.
Patti: It’s amazing to me. That’s a really good point. I have four kids. It’s amazing to me, even with my 30‑year old. He’s looking at buying a house. He’s looking at all of these things and trying to figure out how am I going to do this?
Fortunately, he’s a financial planner so he’s been able to do that. He grew up with this thought process. Again, for those people who don’t have a mom who’s a financial planner, you can start out with a robo.
The advantage to the robo is that it’s cheap, it’s inexpensive, and it just gets you started. There’s value in that. Do you absolutely have to have a robo? Not necessarily, you could actually go and invest in a no‑load mutual fund, stick it in one of the target date funds.
Again, long‑term be as aggressive as you can. Understand that markets are going to go up and down. I think that that’s the most important differentiation is what happens when things go wrong?
Brad: You would definitely understand about yourself. You have enough discipline to stick it out at times like that. A very valuable service that an advisor can offer is to smooth out those emotional highs and lows.
They can explain, and educate, and talk about why this is happening and why it’s happened a hundred times before. A robo can give you an optimal asset allocation theoretically, but it can’t force you to keep it. You could save for 10 years and leave the market at the wrong time.
The robo has no ability to stop you or to protect you from yourself.
Patti: Exactly. I use that phrase all the time. Most of the time, or a lot of the time I should say, what we end up doing for people is just really saving them from themselves because, again, it’s human nature to be fearful.
It’s human nature to say, “Oh my goodness, the markets are going down. I’m going to pull it out, or I’m going to stop contributing.” That’s exactly the opposite of what they should be doing. I think your statistic, the Fidelity statistic, was fascinating.
Brad: About how it seems like clients always seem to add money to the asset class that’s the exact wrong thing to be adding to at the time like chasing returns or investing in an asset class that has recently done well or avoiding one that’s recently done poorly.
You’re doing the exact opposite of…You’re buying high and selling low.
Patti: It’s the rear‑view mirror thing. I’ve been doing this for 32 years. One thing that hasn’t changed is, again, that human nature. You want to be investing in the thing that you think is going to continue to do what it’s been doing the last year or two years, etc.
Usually, that’s exactly the opposite of what you should be doing. That’s where a good advisor can point those things out. Just as those questions become apparent and someone’s asking that, we can show the data to say, “The reason that we’re doing this is A, B, and C.”
Again, nobody really knows, that’s the most important thing to recognize. That we’re all making educated guesses, but it’s the underlying experience, having been through it time and time again that can really make a difference.
Again, starting out robos can be a perfect way to start out, get you in the habit of just saving money, investing in aggressive. Go through a couple of rough spots, but an algorithm isn’t going to necessarily get you to do the thing that’s probably going to be the right thing for you.
When we think about this whole thing and the idea of automation and the online stuff, I think also the other thing about it is is that people’s financial situations are far more diverse. They’re much more all‑encompassing.
An advisor, whether it be a certified financial planner, hopefully, or just another advisor, a financial advisor of any kind, they can take a look at your tax return. They can remind you to update your will, get the power of attorney updated, things of that nature.
You might have questions about parents. They can help you with those things. Healthcare, it’s a holistic approach to your financial situation. You’re not a pie chart. When you start out, really what you need is what you’ve said.
Save as much as you possibly can, especially before your life becomes complicated. You got the life, the wife, the kids, the cars, that’s the complicating factors. That’s when sometimes it’s important to be able to bounce ideas off of somebody who already knows you.
We may have clients who come in who are in the exact, similar situations. They may be the same ages. They may have the same level of income, kids, etc. Yet the advice that we give them is different because they’re different.
They have different priorities. Some people want to pay for a full college education. Some people want their kids to have skin in the game. Some people, cars are important to them, the other family. They drive them until they drop.
Everybody’s different and then to take all of that, including the human emotion, and to create strategies that are actually going to be workable for those people.
Brad: Also, there’s a real benefit to the ability to coordinate with other professionals. As your life does become more complicated, you have somebody that can coordinate with your accountant, coordinate with your estate planning lawyer, and things like that.
Which an advisor can quarterback that from the financial planning side and either work with them or even bring things to their attention that they never would have thought to ask their accountant in the first place.
Patti: It’s amazing some of the insights that just reading someone’s documents that we’ve been able to bring to their attention that they didn’t realize was in there and the implications. Because we’ve worked with so many people over the years, we see the before, the during, and the after.
When I’m able to point out to a couple that based on what their will says, this is what’s going to happen. Is that what they really wanted to do? I’ve got to tell you, Brad, I can’t tell you the number of times people come back and say, “Is that really what we said?”
I said, “Well, it’s what this says. Tell me what you want.” It’s a wonderful, wonderful way to bring this full circle. To make sure that what they really want is actually going to occur.
Brad: In the end, it is a tool that you can use for a very specific purpose. It’s programmed to do exactly what you want it to do. It’s great for an individual with simple cases.
We use several different, call them software programs, or robo‑advisors that we use internally to make a lot of decisions and to monitor across a broad spectrum of points of data, clients, and all kinds of things that we rely on.
Whatever the word for it you want to use, it’s a robo. It’s a robot. It’s a computer that’s giving a decision based on information we ask it to give us. We need them every day.
Patti: It’s so interesting that you bring that up because I think that the longer that I do this, the more I realize the less I know. The advantage of those programs, it allows us to recognize our own humanity, go into this with humility, and understand that for most of the families, this is a stewardship.
This is pretty much everything that they’ve got. We can’t let our emotions…We’ve got to have the discipline that a lot of people who, maybe, are working for pharmaceutical companies, or they may own a business, etc. It’s not what they do.
They don’t realize that the discipline is actually really important. The experience is also very key with this. To combine the two, to use as much of the artificial intelligence and the software and to program it customly for each client so that we get alerts and alarms when something needs to be attended to.
That’s what that’s there. That’s a beautiful way to use systems like that.
Brad: Absolutely. We have the same emotions that clients have. We’re just an added level of experience and discipline that…
Patti: And we have each other to bounce things off of. That’s the real key. To check‑in and just make sure that we’re always doing the right thing or what we believe is the right thing at the time. Let me play devil’s advocate here for a second for our listeners.
We look at the cost factors of these things. You get a young person and young person might say, “Gee, a financial planner is not going to want to meet with me. I don’t have any money.” That’s the one, one thing.
A second would be, “I’ve got kids in college. I’m planning for retirement. I can’t afford a financial planner.” The robo is an alternative that may, and I caution everybody listening, it’s not always lower cost.
You got to be careful with that as well, but it may provide a solution for people that is easy to use and gets people started. Again, it’s not to say that they’re bad, they’re great if the option is doing nothing. If it’s a way of someone getting motivated and beginning the steps of, “Let me just pull this together and make sure that, at least, I’m tracking towards those one or two things.”
That’s where I think the application is. I encourage everybody to do that. Maybe, when someone does that, you can run the numbers or take a look at it and then bring it to a financial planner or an advisor. Again, I’m biased here, a CFP, to get an extra set of trained eyes on what you’re doing, etc.
To me, planning is a verb. It’s not something that you do once and have it sit on the shelf. It’s something that you’re going back to time and time again to make sure that what you’re hoping for is actually occurring.
Now, as lives get so busy, you may or may not have time to do those things. The key here is to know thyself, be honest with yourself, and understand that that may or may not be something that you’re interested in doing.
If it is, fantastic, all power to you. Do those things. Use the robo approach, and then you’re going to know when, maybe, it’s not enough anymore. That’s the key with all this. There’s no perfect answer for everybody, but to be honest and to recognize this is where I am and to take the step of running numbers and deciding this isn’t working.
Do the things that are necessary to get you on track to the things that are most important to you. If you’re not sure how to prioritize, if you’ve got those competing goals as we all do, that’s when, maybe, having an extra set of trained eyes, someone with experience to sit down with and then to meet with from time to time to say, “What’s new in your life? What’s different?”
Then adjust the recommendations accordingly. Let’s talk about the cost of these things. What was your quote?
Brad: I quoted this morning and said actually, “A price is only a major factor in the absence of value.” I think the point being you don’t want to just compare a financial advisor to a robo‑advisor based on cost. They’re very different products. They’re very different offerings.
You just want to know what you’re paying for with either.
Patti: It’s so interesting. We’ve talked about this. Vanguard has a white paper that they’ve got on their website. The reason that this came about, as I understand it, is apparently Vanguard has three silos, their 401(k)s, the do‑it‑yourselfers, and then the advisor‑led portfolios.
They have been monitoring each one of those silos. They’ve noticed significant differences in, frankly, performance. They did this white paper. They went back and tried to figure out what was the difference and tried to measure the difference between the three, in terms of not only the return according to the Vanguard paper.
A good advisor can add about 2.3 percent per year. It’s not always going to come in performance. It may come in tax benefits and things of that nature. They went into a lot of depth in terms of the things that were done in that third silo that they felt made the difference.
I am reminded of a quote that was on the back of my grandfather’s card. It really is something that meant a lot to me. I’m going to read it to you, and you’ve probably heard this. It’s from John Ruskin. He’s a philosopher.
“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money. That is all. When you pay too little, you sometimes lose everything because the thing that you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot.
“It can’t be done. If you deal with the lowest bidder, it is well to add something for the risk that you run, and if you do that you will have enough to pay for something better.”
That is so interesting. As people listen to this and start to look at that, keep that in mind. There are certain things where you definitely want low cost. You want low cost investments, etc. Is that always going to be the case with the advisor‑led piece? Maybe, maybe not.
As you go through this, let’s pull this together and think about how you might want to approach this decision. Number one, be honest, figure out where you are. Is what you’re doing going to help you to accomplish all the things that you want to do?
Whether you do it yourself, again, be careful with some of the online programs. They will create a fairytale. They’re not very accurate but, at least, do something. The next step is, do some research.
Look at the different programs out there, pros and cons for each. Figure out how much each one would cost and then, maybe, interview two or three financial planners to get a sense of what that relationship might look like.
Get a sense of what feels better to you and then act. Make the decision and move forward with something because doing something is going to be far better than doing nothing.
Thank you, Brad, for joining me. I appreciate your time. All of you who are listening, thank you for your time and listening to the Patti Brennan podcast.