For the last two decades technology has been changing our lives in a multitude of ways. Where a vacation once started with a trip to a travel agent- we now just go to Priceline.com or TripAdvisor.com. Checking in on friends now means a visit to Facebook.com. And getting to a new doctor’s office can easily be accomplished with Google Maps. So it’s only natural that technology would make its way into financial services sooner or later.
And it has. Checks can now be deposited with a phone picture. Money transferred via internet. And car insurance shopped for on-line. In the last few years new websites have popped up as well, backed by heavy venture capital funding, willing to manage your money. These so-called “robo-advisors” promise low fees, computer driven trading and a bevy of smartphone apps to track your money.
Can they make good on their promises? Only time will tell. Most robo-advisor’s advice rests on Modern Portfolio Theory (MPT)- a theory developed 50 years ago or so which is just that, a theory. I have lamented with some other thoughtful advisors that MPT rests on some assumptions that, while true for the last fifty years, may not always be true (hint: do bonds always rise in price when stocks fall? Check June 2013 before answering). Others have pointed out the poor quality of financial planning these firms do. Indeed, a conversation a few months ago with an employee of one of these firms yielded an admission that their planning is “not good.. but the clients don’t know any better, so it doesn’t matter.”
Mike Tyson once said “Everyone has a plan until I hit them in the face.” It’s likely the nicely positive market returns of the last few years has given these websites a good runway to get started. The question will come when the market turns south. Buying a cheaper box of cereal is one thing, but will people trust their retirement to the lowest cost provider? Do you want to? And when the market crashes will a computer algorithm be able to console and keep on the right track those who just saw 1/2 of their investment portfolio disappear?
Ultimately, I believe robo-advisors will have their place; and in the end, consumers will win. Like me, they rail against commission-based investment products and high fees. Unlike me, their financial planning is less than informed and lacks the ability to integrate numerous areas of financial planning and ever-changing tax and legal environment. I believe the next ten years will see an integration of many of the things robo-advisors do now into the more traditional wealth planning models. But the best-served clients will still be the ones with the most knowledgeable advisors. Indeed, sometimes paying a little extra can get you a lot better quality result.
The Prior Month
For the first month since January, stocks fell as the S&P dropped 1.5% in July. Small-caps, as measured by the Russell 2000, fared much worse dropping 6.2%. Interest rates on the benchmark 10-year U.S. Treasury rose slightly again from 2.52% to 2.56% as the Federal Reserve lopped another $10 billion from its quantitative easing program. Unemployment inched higher to 6.2% as the U.S. economy added 209,000 jobs according to the July Department of Labor report. Second quarter GDP came in smokin’ hot at 4%. It was this white-hot GDP report that sent stocks tumbling on the last day of July as investors feared the super-charged GDP number may press the Federal Reserve into raising interest rates sooner than expected, an action which would serve as an economic dampener.
After a down July investors will see if the market recovers in August. Indeed, the S&P 500 hasn’t suffered declines two months in a row since May of 2012. Make no mistake, some technical damage has been done the last few weeks as numerous high volume “distribution” days have been seen. Don’t count the bulls out just yet, however, as this long uptrend is still not materially broken. The Federal Reserve has its annual retreat in Jackson Hole, Wyoming later this month. Expect more conversation on whether the U.S. economy can sustain itself without Fed intervention. Expect trading ranges to get small as many head for one last weekend at the beach. August is notorious for being the slowest month of the year.
25% of American men are now six feet or taller, compared to only 4% in 1900.
Calendar of Events
Last month I went up to Longmont and worked on two homes for the Boulder County Care Connect “Yardbusters” program. This great non-profit helps the elderly and disabled in Boulder county with general home maintenance tasks such as mowing, raking, weeding and trimming. Please join us next time on the morning of August 16 and help the elderly and disabled in Boulder county. E-mail me if you’re interested in joining the Flatirons team.
Have a great July,
Steve Zakelj, CFP®