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Financial Fitness - Human vs. Virtual Advisors

Thursday, June 23, 2016

by Sheila Jamison and Rich Jamison

Do you want to do and have what you want when you want? How about without concern for paying next month’s phone bill on time? With some planning, you can.

Bold statement? You bet. Here’s another. You can have anything you want. You just can’t have everything you want.

What It Takes

The word “financial” frightens many people – of all ages. No age group has cornered that market. The main reason is the need to know how to do the things that need to be done.

Things come at a price. That means you can have them…if you’re willing to pay the price. Paying the price often means sacrificing something else you value less. Trade one thing you want for another you want more. The ‘trick’ lies in making those choices – in getting fit financially.

Fountain of Knowledge

We’re surrounded by instant information. Extracting useful information from the flood available is another matter. We’ve often likened getting information from the internet to getting a sip of water from a fire hose. Lots available…but lots you can’t use.

Financial fitness is similar to physical fitness. Both take discipline and patience. That several different paths you can take lead you to your goals can create confusion. Like getting in physical shape, you have multiple options for taking control of your personal financial situation.

Options for Getting Financially Fit

1. Manage your net worth by yourself

2. Hire a robo advisor (i.e. use an app)

3. Hire a real advisor (i.e. hire a coach)

Discipline Is Required for All 3 Options

Whether you choose to manage your own financial plan or choose to get assistance (through apps, websites, or by working with a financial advisor), executing a financial plan requires discipline.

We all know that developing a plan to get into physical shape is VERY different than executing that plan! Most of us are not disciplined enough to maintain our motivation to eat better and be more active every day. Most of us need another person to motivate, guide, and hold us accountable in order to see the results we desire.

Managing Your Plan by Yourself

No matter how you choose to manage your personal financial plan, keep in mind that even athletes who train based on their own plan do not train alone. Even if you prefer to plan alone, it’s a good idea to speak with a professional at some point to make sure you are on track to achieve your goals. Everyone can benefit from input from other people to keep them moving forward on the right path.

Robo Advisors vs. Real Advisors

Now let's look at the latest option available to investors. The media calls them "Robo advisors", (also written as “robo-advisors”).

Investopedia defines robo-advisors as "an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors use similar software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning."

As we discussed earlier, fitness apps give you instructions on how to get fit. However, an app cannot tell you how to adjust your training routine when you have an injury. Nor can an app (or robo-advisor) offer advice for your particular situation. It classifies people into classes and lumps everyone in each class into the same program.

Robo-advisors use similar software that many traditional advisors use. Using this type of service and management style can lead to precarious risks that you are taking with your hard-earned money. (As we've discussed in a number of Insights, we don't subscribe to traditional investment approaches. Jamison Financial Group thinks outside the box – check it out here.)

So let's look at some examples of what a human advisor can do for you that an automated service cannot.

Robo-Advisors Do Not Offer Financial Planning

While updating a client’s financial plan, she said something that sparked an idea. (We had her verify it with the accountant and estate attorney she was working with.) Converting her current account into a T.O.D. (Transfer on Death) account would cover her needs. Moreover, it would do it at considerable cost savings over the options she had been considering.

Because we had a relationship with this client, we knew what questions to ask. We could integrate the pieces so that all of them were aligned with her long-term plans and objectives. This is a simple example of how automated services cannot offer individualized planning.

It’s worth noting that if you call a robo-advisor, you may reach only an automated system. If you do get a live person, it’s unlikely to be the one you reached the time before. Quickly written notes made by the previous customer service rep cannot replace personal one-on-one service. A call center is there to offer "a la carte" services, not adequate advice or long-term planning. Jamison Financial Group works to make sure that we get to know you, your family, and what keeps you up at night.

Robo-Advisors Can Create Conflicts With Your Plan

Can an automated service provide a T.O.D. option for your account? I hope so. However, does it mean it's the best option for you? Well, it's difficult to know, since you are relying on someone at a call center to answer this question for you. They don’t know you and your unique circumstances, so how can they hope to answer your questions accurately?

Robo-Advisors Don't Look at Your Specific Tax Situation

Robo-advisors don't look at your individual situation for planning, tax, retirement or otherwise. They are not there to identify these types of serious long-term issues. But human advisors take the time to look at these significant planning concerns and goals. We make it a point to do so.

Why is this important? Consider this real-life example.

In 2010, federal estate taxes were zero. A client (and friend of Sheila’s for years) called to alert us that she was in the hospital and about to be declared incompetent. We knew that she had Lupus and needed a kidney transplant, but that she was refusing the transplant. We had many discussions with her previously about getting her estate in order. The only conclusion we could draw now was that she was simply tired of fighting Lupus. She had had just about all she could handle.

But that day, she was ready to take action …even though it was at the 11th hour. She asked Sheila to get an estate attorney to her in her hospital room that day. Not a small request, but Sheila immediately became ultra-determined to get it done. Through contacts, she did.

This enabled the woman to clear up very serious matters that help her find peace. Same-sex marriage was not an option in that region in 2010. She wanted her partner to have decision making on her Health Proxy. She needed to take apart monies that they had combined so that her partner’s interest would remain intact. She knew that this would elicit a storm with her family, despite the fact that she saw to it that they would all be treated very well upon her death.

Why had she waited until this last minute when options that might have been available a month before were no longer viable? The only conclusion that made sense to us was that she just couldn’t deal with her death. While this may seem unusual problem, it commonly stops many people from taking the time to decide exactly what they want done when they die.

The last minute moves achieved some of her goals, but at a cost to her surviving partner over $600,000 in NJ estate/inheritance taxes. She paid 30% of the estate to NJ in taxes – a loss that could have been reduced or eliminated altogether with sufficient planning. One option she had was to simply move to an apartment she and her partner owned in NY. We never discussed that option, because she hadn’t revealed that apartment’s existence. This is merely one example of a thing that could have been discovered and improved by detailed financial planning.

Robo-Advisors Offer Minimal Investment Options

An athletic coach can choose from a wide range of training options and supporting aides to personalize your training and optimize your performance. At Jamison Financial Group, we can choose from thousands of stocks, bonds, mutual funds, ETF's, etc. Just like the coach, we provide personal planning and advice from a wide range of available investments and insurance options.

To the contrary, robo-advisors generally have a limited number of investments to offer. Similar to your 401(K), there are usually a couple of dozen mutual funds or ETFs available. Remember, these robo-advisors are putting you into one of several predetermined programs - the same ones that everyone else receives, nothing more. Working with an average program yields average results. It definitely does not win games.

Robo-Advisors Are Cheaper…But At What Cost?

Some people claim Index funds are just as good as other funds. They're cheaper too! However, cheaper is not always better. You may have heard the expression, “You get what you pay for.”

Free advice on the internet is often misunderstood, not applicable to a specific situation, and often incomplete. Following the advice on the internet can cost you dearly in the long run.

Some people are enamored with "no load” funds. In the worst case, they believe that “no loads” outperform other funds within the same class. However, this is frequently inaccurate.

First "no load" does NOT mean "no cost." Funds that advertise as "no load" still charge fees – the kinds of fees that sparked the “hidden fees” pushback. Though there is no visible cost to buy a no load fund, that fund can cost you through an unseen deferred charge, maintenance fee, marketing fee, etc. There is always a charge. After all, no one works for free - including you! Moreover, “load” funds can sometimes provide you with greater net gains - i.e., you have more money after all expenses have been deducted - than similar “no load” funds provide. Be wary when you’re told to buy a particular fund because it’s “no load.” A more apropos quote to end this section might be Robert Kiyosaki’s, “The most expensive advice you can receive is free advice.”

Value of a Human Coach

At the end of the day, you don't use a robo-doctor, a robo-CPA or a robo-attorney when you need real help. Why would you treat your hard earned money differently than your health, taxes or legal situation?

Plus, you can't afford to get the wrong advice - particularly when planning for your future. Also important - your plan needs updating when life sends you roses and curve balls. You have goals to achieve! And you'd like to have help achieving them.

Find an Advisor That Fits Your Needs

At this point, you may be realizing that you need more guidance and coaching than you are currently getting. One-size-fits-all financial plan does not fit your specific situation.

Not all financial advisors will fit your situation. Many advisors focus primarily on insurance products. Some advisors work predominantly with retirement accounts. You might need someone who works with small businesses or long-term charitable planning.

So, be sure to ask your financial advisor questions to make sure they fit your situation. And make sure your financial advisor is comfortable asking you personal questions. Additionally, make sure you aren’t too intimidated by your advisor to ask them questions. Communication is a two way street, and you need to have an ongoing dialogue with the person managing your money.

Remember, this is your training program. You’re doing this to benefit your financial plan, so you need to feel comfortable with your financial advisor.

At Jamison Financial Group, each person is always more important than a spreadsheet or pie chart. We want to address your fears and insecurities since they can adversely affect your decisions and your portfolio.

At the end of the day, you are running this race. We want to be your personal coach, making sure you have trained for every possible situation. That way you’re prepared to achieve your personal best!

Give us a call today to get started towards your goals.

Sources:
Robo advisor (robo-adviser). Investopedia.com.
Buying mutual funds: load or no-load? Heather C. Liston, Bankrate.com. August 14, 2009.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy. Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization. Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice. All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system. The S&P 500® is a market-capitalization-weighted index of common stocks. Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation. Past performance is no guarantee of future results.

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