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The Problem With Robo-Advisors
Oct 15, 2020
Technology has revolutionized every aspect of our lives, so it shouldn’t come as a surprise that tech-based investment platforms, known as robo-advisors, are becoming more popular. Robo-advisors were created in the aftermath of the 2008 financial crisis, as an alternative to traditional financial advisors and investment managers. This year, robo-advisor platforms crossed the $1 trillion threshold in assets under management.1
These web- or app-based platforms usually use a survey to gather information about your goals, assets, and risk tolerance. Then, based on that information, the program automatically develops and implements an investment strategy. There is usually little or no interaction with an advisor, so everything is based on your answers to the survey questions.
Because there is no human interaction, the fees with robo-advisors are often lower than you might find with a traditional advisor or investment manager. However, cheaper isn’t necessarily better. There are many important functions that a robo-advisor can’t perform. Below are a few services you can’t get with a robo-advisor:
Financial Life Decisions
Your investment strategy is an important part of your financial life, but it’s just one piece of the puzzle. Many financial outcomes aren’t driven by your investment strategy, but rather the choices you make with your investments in life.
For example, how much should you contribute to your 401(k) each year? Is a traditional IRA or a Roth IRA right for you? What can you do to minimize your taxes each year? When’s the right time to file for Social Security?
A computer can’t answer these questions because it doesn’t understand your full financial picture. These questions and more are often very complex and require nuanced answers based on your unique needs and goals. Real human consultation with an experienced professional is often an effective way to find answers and develop a strategy.
Accurate Answers and Input
Like most technological strategies, a robo-advisor’s output is only as good as the input. These platforms rely on your initial answers to develop your strategy.
But what if your answers to the initial survey aren’t correct? While you may be asked about your goals or risk tolerance, it’s possible that you may not truly know the answers. Do you really know if you will retire at age 65? Do you know how you would react if the market declined by a certain percentage?
Again, a conversation with a professional can help you fully understand your goals and your feelings about risk. That way, your strategy can be based on what you truly need and desire rather than based on a quiz that took a few minutes to complete.
Protecting You from Yourself
When the COVID pandemic began in late February, the S&P 500 declined by 33.93% in a month. Did you feel tempted to sell your investments and move into cash or other less volatile assets? If so, you’re not alone. However, had you done so, you may have missed out on the market’s bounce back. Since March 23, the S&P 500 has climbed 49.35%.2
It’s natural to feel anxious or unnerved by market declines, especially when it falls as rapidly as it did earlier this year. However, an advisor can help you look at the long-term strategy and help you determine if a change in allocation is actually warranted. A robo-advisor simply executes your order to sell without any consultation or advice. While that may be convenient, it may not be the best decision for your long-term goals.
Looking for custom advice and strategy to help you reach your biggest financial goals? Let’s talk about it. Contact us today at Midwest Retirement Advisors. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation.
1https://www.tradersmagazine.com/news/robo-advisors-to-become-1-4t-industry-this-year/
2https://www.google.com/search?q=INDEXSP:.INX&tbm=fin&stick=H4sIAAAAAAAAAONgecRowi3w8sc9YSntSWtOXmNU5eIKzsgvd80rySypFBLnYoOyeKW4uTj1c_UNDM0qi4t5FrHyePq5uEYEB1jpefpFAAAU6wGESAAAAA#scso=_QQBhX8b3K5K-tQbo56XwCw7:0
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency. 20419 - 2020/9/17
News
In true 2020 fashion, the presidential election has been a rollercoaster ride. On Saturday, November 7, four days after election day, most media outlets projected Joe Biden as the next President of the United States.1 However, the call for Joe Biden didn’t come without suspense, as the country waited for days for ballots to be counted in Pennsylvania, Arizona, Georgia, and Nevada.1 As of Monday, November 9, President Trump and many members of the GOP claimed that the election had been marred by fraudulent activity, and they vowed to pursue legal options to resolve those alleged issues.2 Barring any legal rulings that change the outcome, it appears that Joe Biden will be sworn in as the 46th president on January 20, 2021. What does a Biden presidency mean for the economy, the financial markets, and for your nest egg? Taxes What does a Biden win mean for the economy? It’s difficult to say. One certainty is that a Biden administration would pursue a wide range of tax increases. Biden’s tax plan includes income tax increases for those making more than $400,000 along with increases in payroll taxes, corporate taxes, and capital gains. The Tax Foundation estimates that the Biden tax plan would reduce GDP by 1.62% over the long-term.3 COVID and Stimulus However, there are some who think a Biden presidency could positively impact the markets and the economy. David Wessel, director of the Hutchins Center at the Brookings Institute, said that the coronavirus pandemic and any possible stimulus are the biggest near-term economic issues.4 He added that the paths each candidate may take on those issues are substantially different. Biden is expected to push for a large stimulus package for both individuals and businesses. “In fact, that’s the scenario the stock market seems to be expecting and welcoming, even though Joe Biden is talking about raising taxes on investors,” Wessel said in an interview with NPR.4 Energy Prices Some also speculate that a Biden presidency may lead to higher energy prices. A recent study from GasBuddy reported that “a Joe Biden presidency would favor more environmental controls with respect to drilling and emissions, increasing fuel mileage standards, alternative vehicle power like electricity, expanded tax credits benefiting fuel efficient vehicle owners, and evolving from fossil fuels.”5 Patrick DeHaan, head of petroleum analysis at GasBuddy, added, “Biden would end drilling, curbing U.S. oil production and end fracking, which could potentially send oil prices and thus gas prices higher.”5 Is Biden or Trump better for the economy? Since it’s election season, there’s always speculation about which candidate will be better for the economy and the financial markets. However, the truth isn’t so clear. According to Michael Townsend, vice president of legislative and regulatory affairs at Charles Schwab, “Markets are not historically affected by which party wins the White House and/or control of Congress, and that seems to be the case again this year.”6 This year has been one of uncertainty, and that will likely continue in 2021, regardless of whether Joe Biden is president or not. Let’s connect today to analyze your strategy and take action to protect you from market and tax risk. Contact us to start the conversation. 1https://www.cnn.com/2020/11/07/politics/joe-biden-wins-us-presidential-election/index.html 2https://www.theguardian.com/us-news/2020/nov/08/donald-trump-concede-legal-challenge-republicans-joe-biden-golf 3https://taxfoundation.org/joe-biden-tax-plan-2020/ 4https://www.npr.org/2020/11/03/930722317/how-the-presidential-election-winner-could-effect-the-economy 5https://www.marketwatch.com/story/why-a-biden-presidency-may-lead-to-higher-gasoline-prices-11603992805 6https://www.azcentral.com/story/money/business/economy/2020/11/03/how-biden-trump-election-win-affect-stock-market/6127375002/ Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency. 20570 - 2020/19
This year has been a rollercoaster ride. COVID has dominated the headlines and impacted every aspect of our lives. It has shut down businesses, schools, and workplaces. It’s changed the way we interact and socialize. And of course, it has deeply impacted the economy and the financial markets. It can be hard in 2020 to find the good news, but there actually are a few economic developments for which we can be grateful. There’s also quite a bit of uncertainty ahead of us. As we approach the end of 2020, now may be a good time to reflect on what has transpired over the past 11 months, and what steps you may need to take to prepare for what comes next. Below are three positive developments that you may want to consider as you prepare for 2021: The Markets Rebound COVID ended the longest bull market and longest economic expansion in history. The previous bull market started in 2009 and lasted for nearly a decade before crashing in just a few short weeks over February and January of this year.1 Between February 19 and March 23, the S&P 500 fell 33.93%. Since that point, though, the markets have surged. From March 23 through October 29, the S&P 500 is up 47.94% and is nearly back to its pre-COVID levels.2 As mentioned, though, there is still uncertainty ahead. The COVID pandemic is far from over. There’s also uncertainty about how the results of the election will impact the markets, the economy, and the country’s COVID response. While the market's rebound is a fortunate turn of events, there’s no guarantee that it will continue. Now is a good time to evaluate your strategy and lock-in any gains before another potential downturn occurs. A financial professional can help you explore options. GDP Surge In the second quarter, GDP fell by 31.4%, the largest quarterly drop in history. In the third quarter, it rebounded by 33.1%, the largest quarterly gain in history. That number easily beat the previous record of 16.7% in the third quarter of 1950.3 Much of the rebound was driven by the service industry and the reopening of much of the economy. Of course, the continuing rise in COVID cases may threaten the economic rebound. Twenty-nine states hit record levels for daily new cases in October. Forty states had an increase of 10% just in the last week of October.4 CARES Act Financial Flexibility The COVID pandemic and its economic fallout have created financial challenges for millions of Americans. While the government is still debating a second round of stimulus, the first round, known as the CARES Act, continues to provide financial flexibility for those facing difficulties. As part of the CARES Act, you can withdraw up to $100,000 from your 401(k) or IRA without facing early distribution penalties. The taxes on the distribution can even be spread out over a three-year period.5 Granted, withdrawing money from your 401(k) or IRA isn’t the best strategy for your retirement. However, it is an added measure of flexibility that didn’t exist prior to this year and it could be a blessing if you’re struggling due to the COVID pandemic. The end of 2020 is approaching. It’s been a rollercoaster ride, but there have been some positive developments, especially in the second half of the year. Let’s talk about how to protect what you have and limit your exposure to future risk and uncertainty. Contact us today at Hampton Financial Services and let’s start the conversation. 1https://www.cnn.com/2020/03/11/investing/bear-market-stocks-recession/index.html 2https://www.google.com/finance/quote/.INX:INDEXSP 3https://www.cnbc.com/2020/10/29/us-gdp-report-third-quarter-2020.html 4https://www.cnn.com/2020/10/28/health/us-coronavirus-wednesday/index.html 5https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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