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The Case Against Robo

Of recent, automated investment services, also known as robo-advisors, have grown in number and public awareness. Further, virtual financial planning, in which the consumer has no in-person contact with their advisor, has grown in popularity amongst millennials. These services fill the space of a low-cost & low-touch product that will be attractive to some. However, I wanted to share some thoughts on why we feel the client-facing & human-advisor relationship will endure.

As humans are emotionally-driven, the majority of the population may find greater benefit with a human relationship versus an online robo-investment advisor or a virtual financial planner.

Robots can fly airplanes. Robots can perform surgeries. And robots can drive cars. But how many of us would be comfortable with flying in a robot controlled plane through the rocky mountains from Boise to Salmon, Idaho? As the plane sways left to right, and drops from the unstable wind through the mountains the visual of an actual human who is calm and in control is suddenly more comforting than you once thought. Believe me. I experienced it last year. The fellow passenger next to me was a fighter jet pilot for the Air National Guard. He too was shaken by the unstable ride in the tiny aircraft. I became very concerned when he started to brace the walls of the plane during drops through air pockets. I was then comforted when he remarked, “The pilot looks like he knows what he’s doing.” I don’t imagine I would find the same comfort in knowing that it was some very smart robot.

We can relate the market downturn of 2008 to such a rocky and unstable airplane ride. In a time of crisis, would you find satisfaction with a website portal (robo-advisor), a phone call or video conference (virtual advisor), or an in-person meeting? Since 2009, the stock and bond markets have been relatively steady and exhibited below average volatility. It has been easier to feel comfortable with putting your portfolio and your financial plan on auto-pilot, and to discount the value of an actual person to help talk you through bouts of irrational decisions. However, how would you feel if the market dropped 20% in a single day like it did back in 1987 and your only course of guidance was to log into your robo-advisor portal? Our own Matt Tanaka was working with Schwab during that harrowing day back in 1987. He recalls that the incoming phone calls were so overwhelming that the trunk lines were overloaded and clients could not even be put on hold. Panic ensued and outer island clients flew to Oahu to visit Matt in-person at the Honolulu office. Or if we have another 2008 and the S&P 500 declines by more than -36% and your advisor says to meet over Skype? These are scenarios you should think about when deciding on your choice of investment and financial planning advice. Your advisor; robot, virtual or actual, should be the one to help you maintain focus on your goals 10, 15, 20, 30 years down the road. If we have another severe market sell-off, similar to 2008, I am afraid robo-advisors may not be able to help investors from making irrational decisions. It only takes one bad decision to compromise years’ worth of investment gains. This is also known as the behavior gap and the CFA Institute authored an exceptional post that you can find below.

The importance of your finances & human interaction

If you were to rate the most important things in life what would they be? Would finances be one of your top choices? If so, why in the world would you let a robot, or an individual whom you have never seen, be in control of your financial plan? With the proliferation of online robo-advisors, and virtual financial planners, let us not forget why we human interaction is so impactful and important.

Face to face interaction can deliver information that is not picked up by an online questionnaire or a phone call. Online capabilities can be fantastic for goods such as t-shirt printing or a logo design. However, for something as critical as your retirement portfolio and your financial plan it is helpful to have an actual interaction that delivers body language, facial expressions, and non-verbal clues. The face is the organ of emotion. It will be difficult to pick up on these clues over a video conference, a phone call and much less through an online risk tolerance survey.

To be or not to be: The fiduciary question

The hot topic of 2016 was the Department of Labor and the fiduciary ruling. Under the Trump administration the impact remains uncertain. Simply, a fiduciary relationship with your advisor is one in which your advisor, by law, places your interests ahead of their own. Hmmm. That sounds like it should be a basic principle of a client and advisor relationship, right? Mosaic Pacific Investment Advisors is a fiduciary and has always been a fiduciary. In contrast, broker dealers, insurance agents and some advisors operate under a lesser mandate called the “suitability standard”. Here, your advisor is only required to recommend what is “suitable” for you at the time of investment. In a world in which we are trying to move away from conflicted advice, some robo-advisors and brokerage firms remain in grey area. Search for keyword ‘conflict’ in the account agreement and you may be surprised at what you will find. Below are excerpts from advisory agreements of several robo-advisors.

  • I understand that because ABC, CDE, EFG, and XYZ Bank are affiliates, and because the affiliates earn revenue directly or indirectly from the Program, this results in a number of conflicts of interest as more fully described below and in the Disclosure Brochure.

  • Client agrees that Acme Financial, or any person controlling, controlled by or under common control with Acme Financial, may act as broker for both Client and for another person on the other side of any transaction involving funds or Securities in the Account (“Agency Cross Transaction”). Client recognizes that Acme Financial or its affiliates may receive commissions, and have a potentially conflicting division of loyalties and responsibilities regarding, both parties to such Agency Cross Transactions.

  • Looney Tunes Capital or Pluto Bank may receive compensation or other consideration for the placing of orders with market centers for execution. The amount of the compensation depends on the agreement reached with each venue. The source and nature of compensation relating to the undersigned’s transactions will be furnished upon written request.

In summary, technology and innovation are vital to growth of an economy. It fosters ambition and constant development and refining of goods & services. I feel the wave of interest in automated investment and financial planning services has done just that. It compels existing providers to clarify and define the value proposition, and focus on the underlying goal of providing sound advice in a user-friendly format.

Cory Nakamura CFA, CFP® Chief Investment Strategist and Financial Advisor CFA Charterholder


What a Certified Financial Planner™Professional Can Do for You Honolulu|Hawaii Mosaic Pacific Investment Advisors, LLC is a Registered Investment Advisor in the state of Hawaii. This information is provided for general education and is not considered to be investment advice. Please contact your advisor for specific advice concerning your financial situation. Any rates or projections noted herein are for illustration purposes only and does not reflect current interest rates nor is a forecast of future returns or interest rates. Transactions requiring tax consideration should be reviewed carefully with your accountant or tax advisor. If you would like more information on our firm our ADV Part 2A (Brochure) is always available to you at no cost. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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