Last August, readers of Business Insider were introduced to Susan Shaffer, a Philadelphia divorcee who invested about $100,000 worth of retirement savings with a so-called 'robo-advisor'.
As noted in the article, Shaffer had been investing for about 25 years, first working "with traditional financial advisors, directly with brokerages, and now, with online investing platform Betterment," according to the article. She had used an online tool to manage her budget—Mint.com—and that site recommended Betterment for investment help, so she decided to give it a try.
What was especially noteworthy about the Shaffer example is that she does not fit the profile one normally thinks of as a robo-advisor client. Shaffer is 67-years-old, a Baby Boomer. The typical robo-advisor customer is a Millennial. And Shaffer is not at the wealth accumulation point in her life. She has reached the traditional distribution phase.
While Shaffer may not be typical of the individuals going online for robo-advisor help, many retirement planners find the term creeping into more conversations.
"I've had a few customers ask me about them," said Don Chamberlin, CEO of The Chamberlin Group in Saint Louis. The Chamberlin Group helps clients with asset management, income planning, estate planning, and tax planning.
"I say it's a good alternative for some people," Chamberlin said. "But there's also a reason why they come to me. Some had some sort of robo-advisor in the past, and it hasn't worked for them. They're looking for advisors that will customize things more for them, understand their needs better, and really have something planned out that will give them more confidence in retirement than just a generic print-out."
Lacking the Personal Touch
That last point speaks to the greatest limitation of a robo-advisor: lack of personal relationship. And it also helps explain why retirement planners need not fear robo-advisors as much as financial advisors.
Robo-advisors are certainly here to stay and growing in popularity. But they seem better suited to younger workers that are actively starting or nurturing a new nest egg, not living off one.
"I think it's a trend that is targeting some of the younger investors—the Millennials, the Gen Xers—in the accumulation phase of the retirement planning," Chamberlin said. "That could be good. It is going to be low-cost for them. And it could be a positive thing for people that may not have any other way of doing it."
So exactly what are robo-advisors and who are they best suited to?
A definition at NASDAQ describes robo-advisors as "online sites that automatically invest money for you based on the proprietary algorithms they've established. They provide asset allocation, portfolio rebalancing and regular account maintenance, among other services. They often invest in index funds that track the market, or low-cost exchange funds (ETFs). With robo-advisors, dividends are reinvested automatically and your portfolio is rebalanced periodically to optimize returns and minimize risk."
For many young investors, robo-advisors may be just what the doctor ordered. But as Chamberlin notes, the ideal client is probably someone that would otherwise get no investment help. If an individual is seeking long-term strategy or is at the point of cashing in on retirement savings, this is not the way to go.
"The Baby Boomers are certainly more interested in working with a personal advisor," Chamberlin said.
"When they start to get out of the accumulation phase a lot of them don't want to do it themselves anymore," Chamberlin said. "Many people are very happy with their 401(k)s growing during the accumulation phase. When they get to the distribution phase of retirement though there are a lot of tax questions to be answered."
These include:
