A recent piece in the Financial Times addressed how “Robo-Advisors” have had to do some hand-holding during the recent volatility which, is the opposite of their algorithm-only design. The article points out that behemoth, Charles Schwab, had calls to their service center increase more than 30%. Other platforms had to determine the best way to deal with incoming calls and emails from worried clients. They don’t have the people to chat with them. So, they had to communicate via the platform itself. Some companies didn’t even bother handling calls. Financial Times wrote, “instead of talking through their fears, Wealthfront ... is directing worried customers to online essays by the firm’s chief investment officer.”
The stock market is looking more like a yo-yo these past eight months than it does like the desired upwards shooting arrow.
Over the past couple of years we have been spoiled. Double digit returns became commonplace. In 2012, the S&P 500 rose 16%, 2013 a whopping 32.39%, and another 13.69% in 2014.
Yet, we saw markets drop more than 10% this past summer and we have already experienced a greater than 10% correction in 2016; all one month of it.
During those fortuitous years, a disruption occurred in the financial industry. New companies deemed “Robo-Advisors” were born. By leveraging the power of technology and thoughtful algorithms they slashed the cost of investing and made it more accessible to the mass-affluent.
In my mind they are a digital mutual fund with an app. However, they woke up the financial world in a much needed way by basically saying, “you better adopt technology or we will take all your business, because this is what your customers want.”
I couldn’t agree more.
But here’s the rub: there was a piece missing…humans. You read that right. Humans.
These companies created technology in order to replace human advisors to help minimize costs. These “Robo-Advisors” focused so much on cutting costs, they forgot what investors really need which is a human. A human to keep them committed to a plan in bad times and someone to prevent impulsive decisions driven by greed in good times.
That’s why we created Wela. Because the opportunity lies in leveraging technology to deliver financial advice efficiently and economically while continuing to provide the human touch.
Investors are emotional and thus, during times of volatility like we are experiencing today, they need someone to hold their hand; to help them stay committed to the longer term strategy and it needs to be from someone they trust. Someone that has helped them get set up, helped them in good times and understands their situation.
The recent volatility is only going to continue and talking to a different person every time you call into your robo-advisor’s call center isn’t going to ease your fears. Or even worse, not having an actual human to speak with at all.
From the summer of 2011 to the summer of 2015 we went 48 months without experiencing a drop in the stock market of 10% or more. That doesn’t happen. That’s why we are spoiled. In being spoiled by these good times investors felt a high level of confidence and thus felt comfortable with a hands off, robo-driven service.
This volatility causes fear. Fear that all your hard work, all the money you saved, and all the years you spent growing your retirement accounts will disappear.
So, without guidance from a professional, you sell. You go to cash. The exact opposite of what you should probably do.
This is why the average investor has only seen returns in the stock market of 2.5% per year over the past 20 years versus the stock market which has seen nearly 10% per year.
That’s where the addition of a human advisor truly pays off. Vanguard recently came out with a study which showed that human advisors can actually add 3% to investors returns. The reason? Not simply because of investment selection or effective rebalancing but, because of behavioral coaching; encouraging their investors during times of worry to stay committed to a strategy and squashing greediness in times of positivity.
“Robo-Advisors” transformed an industry that has always been too stodgy, too intimidating and only for the “wealthy” and for that, we are thankful. However what Wela is doing is taking that transformation even further. We are leveraging the elegance and efficiency of technology and combining it with human financial advisors. Not simply to provide easier access to investing but easier access to a necessary driver of successful investing; a human on your side.
References: S&P 500 returns https://ycharts.com/indicators/sandp_500_total_return_annual Average number of days between 10% drops - Ned Davis Research Average Investor returns - Blackrock (have the chart if necessary) Vanguard stud - http://www.vanguard.com/pdf/ISGQVAA.pdf
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.