Thursday, May 5, 2016

Low Cost Personalized "Savings, Spending and Investing Advice for the Rest of Us" is an Idea Whose Time has Come

The value of a personal service, including investment advice, is simply and directly related to the quality of the personal service being offered in relation to its price.

And the overall benefit and quality of that service is best determined by a knowledgeable and informed prospective buyer and beneficiary of that offering. It's really just that simple.

This common sense grounded rule applies not only to investment advice but to all other things offered for sale as well.

The customer decides and the more the customer knows about what is being 'sold,' the better the customer's choice will be.

So let's compare the services of robots and pricing versus knowledgeable investment advisers and what they charge.

The Pros and Cons of Using a Robot as an Investment Adviser tells an interesting story which should be required reading for all long term oriented individual savers and investors:

"SHOULD you trust your hard-earned retirement dollars to a robot?

These robots, of course, aren’t like those you see in the movies. But they are capable of providing investment advice usually delivered by a human adviser sitting behind a desk — and for a lot less money.

So-called robo-advisers — which assemble investment portfolios after customers answer a series of questions online — have been widely praised for their easy, low-cost approach to investing....

But in recent months, critics have raised questions about their limitations.

The flow of funds into robo-adviser accounts is expected to accelerate because of new federal regulations, which require all financial professionals to put their customers’ interests first, at least when providing advice on their tax-advantaged retirement accounts. The rules, issued by the Labor Department, are expected to push more customers into lower-cost investments. . . .

Robo-advisers were already required to follow the highest standards of consumer protection — on every dollar they manage, not just retirement money — because most of them are registered investment advisers. That means they are required to act as fiduciaries, the legal term meaning they must put customers ahead of all else. . . .

Given their status, the Labor Department, which oversees retirement accounts, has essentially given the robo-advisers its blessing, since many firms avoid the conflicts of interest embedded in the way the brokerage industry and its armies of representatives conduct their businesses.

But at the same time, other regulators have raised concerns about whether robo-advisers are thorough enough when gathering information about investors. A robo-adviser does not ask about money held outside of its service, for example, which can provide a distorted picture of a customer’s financial standing. Others argue the robo-advisers try to wiggle out of too much responsibility in their customer agreements. . . .

“I am not sure that many investors, in many cases, can be adequately taken care of by answering questions,” said William F. Galvin, Massachusetts secretary of the commonwealth, who likened the services to driverless cars. “You need a human that is responding to them.’’

Arthur Laby, a professor at Rutgers Law School, said investment advisers, as fiduciaries, can limit the breadth of their relationship with clients. Still, he does not view robo-advisers as fiduciaries in the traditional sense because of their inability to address subtleties that may arise in conversation.

“They are not able to provide the kind of personalized advice that a customer can get from a human on the phone or sitting across the desk, where the customer can say: ‘Oh, I have a new wrinkle. I might be inheriting assets in the next 12 months,’” he said. “Or: ‘I may need to care for a sick parent. How will that impact the cash I need?’”

Many robo-advisers say that they make their limits clear, noting that they are not in the business of providing full-scale financial planning. But often that kind of information is buried in the fine print....

The Massachusetts regulator and other industry critics argue that robo-advisers should go further, evaluating assets held elsewhere before investing customers’ money. . . .

Kara M. Stein, a commissioner at the Securities and Exchange Commission, recently said the idea of a robot that generates advice certainly bumps up against the traditional view of a fiduciary, which is based on a human relationship. . . .

For investors contemplating using robo-advisers, perhaps the most important point is to fully understand their limits.

Consumers “have to be aware of what they do and what they don’t do,” Ms. Fein said, “and then make their decision.”"

Summing Up

Low cost and personalized service from a knowledgeable adviser acting as a fiduciary is the obvious best solution for long term oriented individual savers and investors.

The key is to  find that low cost knowledgeable adviser and not be forced to choose between low cost robots and high cost humans who frequently are nothing more than sales persons disguising themselves as knowledgeable advisers.

A value added and personalized offering combining low cost with high service should be made available to all individual savers and investors.

Doing so would amount to nothing more than a knowledge based MOM, aka My Own Money, approach which is too seldom made available as 'savings, spending and investing advice for the rest of us.'

That's my take.

Thanks. Bob.

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