What’s a “robo-advisor,” and why would I want one?

If you’ve been looking to make your retirement money do more, you’ve probably seen the term “robo-advisor” a lot lately. Thinking machines, frankly, are not the first thing we turn to when we want advice. Traditionally they seem more interested in winning arguments, locking the pod bay doors, destroying humanity, and that sort of thing. Siri is better, but not by much. So why in the world would you want to trust your life savings to an algorithm?

These may be the droids you’re looking for

Here are two very good reasons. The first is that while a new breed of online-only investment advisors may have earned the “robo” tag, almost all professional money managers rely on similar technology, models, and methodologies. From the biggest pension funds to the little office down the street, it’s been this way for decades. When you want to simulate how a portfolio performs over decades, say, and do it about a million times to estimate the probabilities, you call in a machine.

The second reason is simply cost. If a computer does the work anyway, why not eliminate the middleman and save a pile of money? We’ve seen technology profoundly change the game in one industry after another. Now the rise of the machines has come to financial services as well.

Still early days

But before you just sign up with the cheapest option, or the one with the best ads, keep in mind that not all robo-advisors are equal. Some require you to transfer all your money to them, while some can advise you on the accounts you already have. Some charge a flat fee, some use a sliding scale, and at least one doesn’t charge at all – but leaves you to figure out how they make money.

It’s even more important to look at what they don’t do. There’s a world of difference between simply managing a portfolio and thoughtfully planning for retirement. Hardcore stochastic modeling is actually the easy part. Realistically choosing how much to save each month, planning together with a spouse, or navigating the mysteries of Social Security or annuities can be much more challenging. Most of the robo-crowd haven’t figured out the more complex stuff.

We’ve been in this business for a long time, so it feels funny to say that the online advice industry is still very young. But in its current form, it is. So if you’re shopping for a robo-advisor, think clearly about your needs, then look closely at their capabilities. You’ll be on your retirement journey for a long time. Make sure you’ll get along with whatever intelligent entity is steering the ship.