I Got My Investment Advice At McDonald’s by Sara Grillo, CFA, President at Grillo Investment Management
A Roboadvisor is kind of like getting your investment advice from the McDonald’s drive through window. It’s a website that provides automated financial advice with minimal human intervention. They basically use an algorithm and some basic input from the client to compose a set of investment recommendations that your assets are invested into. Up until now, the high minimum amounts required for personal investment advice has left the middle class in the cold. Also, these services tend to price out at a rate which you have to be rich to pay. But now here comes McDonald’s. A simple website, a math equation, a low fee – sounds good, right? How do I hand over the keys to the car?
Well, there is one factor that is being overlooked: human emotion. People are emotional about their money. What may seem like a good idea on paper can be seen in a different light when it has a real impact on your real life.
As an experienced financial advisor, I understand how human beings tend to behave when they see their money vanishing before their eyes. Let me walk you through how a typical conversation goes every time I bring on a new client.
Me: So Beth, you’ve got a long time horizon until your kids go to college, 20 years. Now would you say you’re an aggressive, moderate, or conservative investor?
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Beth: Aggressive, for sure. I don’t need this money for a while so I don’t really care what happens to it. Put me in the most aggressive allocation you have.
Me: Are you certain about that?
Me: Well, you’ve got $100k to start with. Assuming 35% annual standard deviation, which is my most aggressive allocation, you would have had $650k during the market crash of 2008. How does that sound?
Beth: Oh no, Sara, on second thought, I’m afraid to take that much risk. Put my money into something more conservative. I can’t put my three kids to college on that amount of money. And, yes, I forgot that my mother is retiring this year so I’ll need to give her $2k per month. Can you factor that in? Sorry Sara, I forgot to tell you that before. It just slipped my mind!
See what I mean? This scenario illustrates how a simple conversation can bring us back in line with what potential outcomes will really mean for our lives.
In summary, although circumstances vary widely from one to another, I would say that roboadvisor platforms are a good way to get financial advice for those who have no emotion attached to their money, a long time horizon, and simple requirements. If you do have complicated trust and estate issues, a need for cash flow planning, or simply are not willing to hand over the keys to the car, better to opt for a human financial advisor. Although many require minimum portfolio values of $500k or greater, there are some out there that will take on a smaller one. They are a bit harder to find.
Indeed, McDonald’s can be a great option , but before you put the pedal to the metal you may want to consult Zagat’s and see what else is out there.