The controversy over robo-investing


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by Vicky Tomaro, president of Tomaro Financial Group

There’s growing interest and a variety of opinions about robo-investing — also known as robo-advice.

Robo-investing relies on automated investment advice. It’s generated by a computer that takes into account personal information and financial goals and inserts the data into formulas written by market mavens. The result of these formulas is a set of rules that govern what and when you should buy, sell or hold. For any given position you’ve taken, it provides near instantaneous financial advice.

Robo-investing is a fairly new phenomenon. Charles Schwab, Merrill Lynch and a growing number of other firms offer it to their customers.

Why? There are a few reasons. First, more and more people want to invest on their own. They buy clothes, food, electronics and airline tickets online, so why not invest online? They feel confident in their abilities without expert human financial advisors.

This trend echoes the near disappearance of the travel agent, and for many the same reasons. It is much less costly to the brokerage — a fraction of the cost of human talent.

Robo-investing is touted as removing emotion from the investing equation. But emotion and experience can be useful tools in dealing with clients when the market is falling. It’s not the time for a robot to be making decisions. Obviously robots can’t reason and they don’t have the perspective an experienced advisor can bring to the table.

Throughout my career, I’ve seen many volatile markets, and that is when clients are most emotional, tending to take their money out of the stock market completely. Afterward, clients often say that they will tell you when they are ready to come back in, but the loss they took is forever. By the time the market (and the investor) recover from the downturn, that investor has missed the momentum and upswing.

Consistently successful investing is a long-term endeavor. In volatile situations, you are best served by having a real human to talk to, one who has seen ups and downs before and knows best how to take advantage of the fluctuations.

Unless you can give the robot a stout heart and understanding of human emotion, there will be times that the investor, in the final analysis, will be very unhappy with its choices. The cold fact is that the robot’s action was probably technically a good one at the moment, but didn’t and couldn’t take into account the emotions of the client.

The robot will do what its internal rules dictate – and in the process, possibly sell off a position that could be the worst course of action for the client in the long run.

There is still much to learn from robo-investing. I do believe the younger generation will embrace it more than others, but with time they will come to understand the need for an experienced advisor. Fees are lower for mechanical trades, but I for one believe in the adage, “You get what you pay for.”


Vicky Tomaro is the founder and president of Tomaro Financial Group in Wall. She may be reached at moc.o1531978244ramot1531978244v@ora1531978244motv1531978244 or (732) 749-3636.

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