When Markets are Down, Who You Gonna Call? Robo-Busters?

Written by our Managing Director: Amit R. Stavinsky-8/20/2015

Can you recall what happened on the week of October 6, 2008?

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That week the Dow Jones industrial average fell 1871.33 points or 18% while the S&P 500 dropped 198.34 points or 18%. ¹ Panic was rampant on Wall Street and investors witnessed their retirement funds dwindle by the hour.

Now, go back in time and imagine you have your retirement savings invested with one of those online startups that uses computer algorithms to allocate investments, also known as Robo-Advisors. You hear the news that the stock market is falling off a cliff, and the first “knee jerk reaction” is to call your Robo-Advisor in order to review your account. You, next, dial an 800 number and on the other end a robot tells you to please hold while it searches for a representative. Finally, a while later, an advisor you had never met or spoke to before attempts to attend to your financial worries. By the time the call ends, the Robo-Advisor may have turned into a Robo-Portfolio Buster.

Outside this doomsday scenario, Robo-Advisors can actually help those in their 20s who don’t have much experience and yet have up to $200,000 in savings. These individuals, can opt for a Robo-Advisor to manage their funds for about 0.25% annual fee; however, successful long-term asset management generally requires a lot more than just low annual fees.

Let’s get the lowdown on two of the more popular platforms out there: ² Wealthfront and Betterment. Wealthfront charges 0.25% annually for accounts over $10,000, and Betterment charges 0.15% to 0.35% annually depending on account size.2 Wealthfront allocates your portfolio based on a risk tolerance questionnaire and depending on your appetite for risk; the portfolio will allocate your investable funds into ETF’s (Exchange Traded Funds) that invest in stocks, bonds, real estate, or natural resources. Betterment has a similar approach; however, they emphasize their auto-allocation using MPT (Modern Portfolio Theory) and they only offer ETF’s that invest in stocks and bonds.

At Tamar Securities, we empower our clients with the opportunity to invest in a diverse portfolio that includes ETF’s, individual stocks, mutual funds, as well as taxable and tax-free individual bonds. We strive to achieve optimal strategic asset allocation on the Efficient Frontier by intimately knowing our clients’ risk parameters, their inclinations during up and down markets, and their long-term goals and aspirations.

Robots might satisfy an interim need as individuals work their way up in their 20s; however, how are they going to tell the client to set up either a trust account or an estate plan? In what ways will the Robo-Advisor position their investments to be ready to fund their children’s college tuition in the future? These are just a couple of questions an experienced wealth management firm can answer and plan for as opposed to Robo-Advisors. In addition, when it comes to preserving one’s life savings, Robo-Advisors can’t hold clients’ hands during market downturns. When clients need them the most to stay put or capitalize on market opportunities, a “Robot cannot jump to your rescue.”

So when the going gets tough, who you gonna call? Robo-Busters? Better yet; investors should try a wealth management firm that knows its clients well in advance and stands ready to take advantage of any market dislocations.