What are the risks of using robo-advisors in your financial planning? (2024)

One of the main drawbacks of using robo-advisors is that you may miss out on the human touch and personal guidance that a traditional financial advisor can offer. Robo-advisors may not be able to understand your unique goals, preferences, emotions, and life situations, and may not be able to adjust your portfolio accordingly. For example, if you are going through a major life event, such as marriage, divorce, or retirement, you may need more than just an automated algorithm to help you navigate your financial decisions. You may also want to have someone to talk to and ask questions, especially during times of market volatility and uncertainty.

Another risk of using robo-advisors is that they may not be able to offer you the level of customization and flexibility that you desire or need. Robo-advisors typically use predefined models and criteria to construct and rebalance your portfolio, based on your risk profile and investment horizon. However, these models and criteria may not capture all the nuances and complexities of your financial situation and goals, and may not allow you to make changes or adjustments as you wish. For example, you may want to invest in a specific sector, asset class, or strategy that is not available or compatible with your robo-advisor's platform. You may also want to have more control over your portfolio's tax efficiency, fees, and performance.

A third risk of using robo-advisors is that they are dependent on technology and data, which can be prone to errors, glitches, and breaches. Robo-advisors rely on algorithms and artificial intelligence to analyze data and generate recommendations, but these tools can have limitations, biases, and inaccuracies that can affect the quality and reliability of their advice. For example, robo-advisors may not be able to account for all the factors and scenarios that can influence the market and your portfolio, such as geopolitical events, behavioral biases, or black swan events. Moreover, robo-advisors store and transmit sensitive information online, which can expose you to the risk of cyberattacks, identity theft, or data loss.

Using robo-advisors does not mean that you have to give up all your responsibility and involvement in your financial planning. You can still take some steps to reduce the risks and enhance the benefits of using robo-advisors, such as researching and comparing different robo-advisors before choosing one that suits your needs. Additionally, you should review and update your risk profile and investment goals regularly, as well as supplement your robo-advisor with other sources of financial advice and education. Furthermore, it is important to monitor and evaluate your portfolio's performance and risk level periodically, and diversify your portfolio across different robo-advisors, platforms, and strategies. All of these steps will help ensure that you are comfortable with the results of your financial planning.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Economics

+ Follow

Thanks for your feedback

Your feedback is private. Like or react to bring the conversation to your network.