My Advisor Is An Android?

Just as Lieutenant Commander Data, the famous 25th century android played by Brent Spiner on the TV series Star Trek, struggles with his lack of humanity and inability to recognize basic human emotions, so too, do robo-advisors lack the ability to empathize or understand the rudimentary tenants of the human condition. Data's sophisticated, futuristic systems and programming are simply no match for the subjective complexities attendant to human interaction. In short, FAs have a distinct edge over robo advisory as they can recognize the subtle nuances essential in providing clients with high-value solutions. Besides, few would consider robo-advisory a braggart’s status symbol—or worthy cocktail party fodder.

Lower Returns

During the 2009-14 bull market, returns averaged an impressive 17 percent annually (S&P 500). But as we approach the end of this market cycle, fully priced stocks will likely limit future returns. And when combined with dangerously high, yet still-rising federal debt levels, slow GDP growth and abysmal bond yields, poor stock returns could seriously impair retirees’ lifestyles. An extended period of difficult market conditions would compel investors to search for a more cost-effective and/or tax-aware investment solution.

Five Best Practices That Add Value:

I. A Core-Satellite Approach And The Use Of Separately Managed Accounts

Core-satellite is a well-established approach to portfolio construction that offers investors the potential for improved performance. With core investments, where little is to be gained from high turnover, less active, lower cost managers become the focus. Emphasis in core is placed upon tax planning and improved after-tax returns while satellite strategies offer unique investment exposures and the potential for manager value add—but are seldom tax friendly. Through the use of separately managed accounts (SMAs) advisors can treat each security independently and in the most appropriate tax-aware manner for each client. Unlike mutual funds or exchange-traded funds (ETFs), SMAs are a portfolio of independently tradeable securities reported on as a whole. With a core-satellite approach that uses SMAs the asset manager and investment advisor have the ongoing ability to add value by working as a team to support client objectives. This collaboration is not possible with the “one size fits all” robo outputs.

II. Understanding Each Client’s Unique Circumstances

Successful tax-aware investment advisory requires in-depth knowledge of each client’s tax situation, securities restrictions, the basis and holding time-frame of each position, monthly cash flow needs, the strategy and timing for deferred asset drawdowns (401ks and IRAs), pending large scale purchases and other relevant factors. Communication with tax and estate counsel is a must if this knowledge is to be used to its greatest effect. Instead of forcing clients to fit an advisor’s “model” (commonly employed to drive simplicity and scale), advisors must strive to build a customized solution dedicated to each client’s specific objectives and constraints. Robo algorithms are limited in the number and depth of the questions they can ask leaving them unable to properly account for unique individual circumstances.