I love Betterment and Wealthfront. These two companies, among the most popular of the independent “robo advisors,” provide a passively managed, super-low cost, tax-efficient, broadly diversified, entirely automated investment process based on your risk attitudes and your financial goals. You can just “set it and forget it.” From an investment perspective, that is pretty much the Holy Grail.

If you are a do-it-yourself-er with a stern backbone and a good grasp on your entire financial picture, there is probably no better place for your money (except possibly Vanguard balanced funds). But what if you have a backbone that can turn to jelly during times of market volatility? What if you haven’t made the time and effort to understand and organize your whole financial life?

Robo advisors can’t help you there. Robo advisors optimize the quantitative, logistical aspect of investing, but don’t (cannot!) address the behavioral aspect and they know almost nothing about the rest of your financial life.

The Overwhelming Importance of Your Behavior

A recent Bloomberg article talked about how the next bear market is going to be the real test for robo advisors. Betterment and its brethren (sistren?) sprouted up in the aftermath of the market meltdown of 2008. Well, we’ve had relatively unbroken, awesome market performance since then. It’s easy to stay invested when your investments go up most of the time. But what happens when the market starts to wobble (as happened earlier this year) or simply Go Down?

An outfit called DALBAR has been conducting a study of investor behavior and investor returns for 21 years. This study usually (always? I haven’t looked at all 21 years) shows that investor behavior consistently hurts their investment returns. For example, DALBAR’s most recent study, the 2015 Quantitative Analysis of Investor Behavior” (described in this article … my apologies…it’s an industry publication, but the part about human psychology should still be understandable), showed that:

In 2014, the average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return. (13.69% vs. 5.50%).

How is that even possible? Because investors chase performance: they buy the mutual funds after the funds have already increased in value, and they sell after the funds have already lost their value (adhering to the rarely heard but demonstrably popular investing advice of “buy high and sell low”).

So what can you do about it?

Vanguard’s 2014 paper “Quantifying Vanguard Advisor’s Alpha” concludes that a full half of a financial advisor’s value to a client’s investment portfolio comes from “behavioral coaching” (1.5% of a 3% total added value; another 0.7% comes from a “Spending strategy,” and the remaining 0.8% is the stuff you probably already know about: asset location, rebalancing, low costs, etc.). In “The 93.6% Question of Financial Advisors” (Spring 2000, Journal of Investing) Meir Statman, professor of finance at Santa Clara University, CA, one of the leading researchers in behavioral finance, showed that less than 7% of the value of financial planning is the investment logistics like investment selection and asset allocation, and that over 93% is managing an investor’s behavior.

Whether it’s 50% or 93.6%, mounting academic and industry evidence shows us the overwhelming influence of our emotions on our investment success. Software-driven investment tools leave your investment portfolio at the mercy of those emotions. Some of you have the discipline necessary to stick to an investment plan (there are, for example, plenty of avid, disciplined DIYers on forums like https://www.bogleheads.org/). If you don’t, you should really consider hiring a professional to help you create a plan–in sane times– and who will then give you the discipline and reassurance to stick to it in, well, less sane ones.

Coordinating with the rest of your financial plan

If you have perused the description of Flow’s Investment Supervisory services, you know that I think investing is one part of a comprehensive, coordinated financial plan. Treating it as a separate part–as it so often is–is folly. It might be ok, but it won’t be as helpful as a coordinated plan, and it could be dangerous. How can you possibly know what investment plan is right for you without knowing how much life insurance you have on your husband, or how much disability insurance you should have yourself, what your child’s college plans are, or or or? You can’t, I say.

If you have all this figured out, then you are an excellent candidate for investing with a robo advisor. It will cost you very little in money and effort, and the investment strategies are thoroughly supported by academic and industry research.

But if you haven’t spent the time and effort to learn what your financial picture looks like now, what your trajectory currently is, and what it should be in order to most effectively reach your goals, then you need to get that in hand before making any significant investment choices. There are plenty of good reasons that might explain why you don’t have a financial plan so far: no time, no interest, no time, not enough motivation, no time, unable to maintain enough impartiality, no time. If you realize that you’re not going to do it yourself, then I encourage you to talk with a financial planner. (Not an investment advisor, a planner.)

If you want to learn more about how to construct and maintain your own portfolio (because you want to do it yourself, or because you want to understand how your robo advisor or investment professional does it for you), there a ton of excellent resources out there. Here is a short but powerful list:

If you are interested in learning about how I can help you manage your own investments and make sure they serve your overall financial plan, please contact me at or schedule a free 30-minute consultation.

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