As with any other field, technological advances have had a tremendous impact on the Financial Services Industry over the past 20 years. Machines and software are capable of doing so many things more efficiently and at a lower cost. The rules for having a successful investment experience have not changed however. You know what they are:
1. Build a broadly diversified portfolio with an appropriate risk tolerance.
2. Minimize expenses including taxes.
3. Stay disciplined.
Technology is a fantastic tool for investment advisors, and as a result we are seeing the emergence of what I call the “RoboAdvisor.” When it comes to building portfolios and minimizing costs, the advantage of using a RoboAdvisor is obvious. It makes it possible for investors to get a well-structured portfolio at a much lower cost.
But what about Rule #3, the need to stay disciplined? Every investor is unique with regard to their personality and all the dynamic variables they deal with in their life. I doubt we will see software anytime soon that will enable a RoboAdvisor to take control of an investor’s emotions.
Advisors know that keeping clients disciplined is by far the most difficult problem they face. It’s when the market is “tanking,” that advisors earn their fee. It can be a challenge, but the most successful and valuable advisors are the ones who have the “people skills” to keep their clients emotions under control.
This 5-year bull market has given disciplined investors a great return but as I have mentioned before, it may also have created a false sense of confidence regarding the ability to stay disciplined. They may believe a RoboAdvisor meets all their investment needs. But I have my doubts. RoboAdvisors will not be conducting any “fire drills,”as I suggested back in July, and will certainly not be there to keep you from getting burned by a lack of discipline.