Technology makes things easy. Sometimes too easy
"Hat-Tip" is written by Nick Lincoln, IFA
Robo-advice is the new black in financial services. It is being written about everywhere. It has even made the national newspapers (such as what is left of them).
For the unaware, robo-advice is essentially a catch-all for automated investing. Using technology, investors can create, monitor and change investment plans online, with no human interaction.
Robo-advice is low-cost in terms of both fees and time. This week, investment fund group behemoth Vanguard launched an ultra-cheap consumer-facing investment platform. It has caused a considerable stir in the (admittedly navel-gazing) financial services world.
Where's the humanity?
What robo-advice does not give you is the human touch. That might suit many people: I always use the fast-checkout queue at ̶A̶s̶d̶a̶ Sainsburys if I possibly can: it means I don't have to queue or - God-forbid - speak to the checkout person. This suits me and it suits Sainsburys.
Of course, as I'm filling my basket, I don't feel myself getting emotionally invested in the bits and bobs I'm buying. Nor do I necessarily feel that I am out of my depth; one toothpaste brand is pretty much like any other.
But with money, in my experience, we do get emotionally invested, way too much and way too often. This leads us to make really silly mistakes, nearly all of which can be encapsulated in two phrases: "buy high, sell low" and "repeat until broke".
Red, Amber, Green
More interesting than it looks. Maybe.
By way of real-life example: a client has an endowment savings plan. He took it out in 1998 and it matures in 2023. From the very start, this plan has not looked like it was doing very well. It was never, according to the insurance company, going to pay out what it was supposed to. It was constantly in an "Amber" state: that's insurance-talk for "Houston, we have a problem".
Until now.
Now, the endowment looks like it should pay out what it said it would, when it should. It is in the "green". But how tempting it must have been for the client to encash out of this plan at any time over the last near-two decades. This period of time saw:
- the collapse of the tech-crazed stock market bubble in early 2000
- the Twin Towers atrocity in 2001
- the launch of a dismal war in Iraq in 2003
- the "Credit Crunch" turmoil of 2007 - 2009
- Brexit and Trump in 2016
amongst various other tumultuous events. Thankfully the client didn't surrender this investment, when all about him were surrendering theirs. The client knew that investing is for the long-term, and that time truly is the greatest healer when it comes to your money.
We don't manage investments. We manage investors
The cheapest robo-adviser is incredibly expensive, if it cannot prevent you from being your own worst enemy. And over the last two decades or so, the opportunities to self-harm (in the financial sense) have been seemingly endless.
Come the next apocalyptic event, how many long-term investors will suddenly become short-term speculators? How many will log-on to their robo-advice investment website, and click on the "SELL EVERYTHING NOW BECAUSE I JUST CAN'T TAKE IT ANYMORE" button?
Our greatest professional value comes from protecting people from themselves; from showing people how short-term fluctuations in the value of their wealth are - in the vast majority of situations - immaterial to their long-term financial well-being. By reminding them that they have a prudent, grounded financial plan that spans decades.
"I, Robot" is science-fiction. "I, Robo" is not
The first two of Isaac Asimov's "Three Laws of Robotics" state that
- A robot may not injure a human being or, through inaction, allow a human being to come to harm.
- A robot must obey orders given it by human beings except where such orders would conflict with the First Law.
If only! During the next crisis ("It's different this time!"), when the tormented investor logs on and bails out of her portfolio, the robo-adviser will, of course, simply acquiesce in this heinous act of financial self-harm. For robo-advice knows not of her (or anyone's) dreams or goals, of which the underpinning investments are simply (but essentially) the means to an end.
technology is generally changing our lives for the better. can you be sure it will do so for your long-term financial wealth?
{The above is not specific financial advice aligned to your unique circumstances and requirements. If you act on this article without first reading your own body weight in Key Features Documents, personal illustrations and fund fact-sheets then you may well be struck down by lightning.}
© 2017 Nick Lincoln
