In the last decade, the popularity of robo-investors has increased dramatically. As with any new technology, many people want to know if robo investors are safe. But safety is a complicated thing when it comes to investing. There is no investment or form of investing that is “safe” in the sense of guaranteed returns or beating a benchmark. If such a thing existed, everyone would use it. But there are specific areas of safety that robo investors can be evaluated on compared to a typical human financial advisor. These areas include safety in terms of human error and emotion, historical records, and data security.
Human Error & Emotion
It’s easy to associate robo investors with less human error and emotion. It is true that the “robo” part of robo advising minimizes human emotions by basing investment decisions off of formulas instead of personal opinions. The problem is that robo investing doesn’t protect investors from themselves. This is likely the largest safety concern of robo investing.
Investors often believe they act logically. But a look at the typical response to a correction in the market paints a different picture. During a market correction, many investors feel the desire to pull all of their money out of the market. This makes sense. Investors feel like they’re losing money and they want to make it stop.
The problem is that if investors pull all of their money out of the market whenever there’s a correction, they miss the opportunity to make money when the market goes back up. In fact, a downturn can be a great time to invest more money in the market. It’s like a sale on stocks. When an investor panics and wants to pull all their money out of the market, a good financial advisor can help talk them through whether it may actually be a good time to do so or not. A robo advisor cannot do this.
Historical Safety
Anyone who has ever read the disclosure found at the bottom of any financial marketing has likely seen some version of the phrase “past performance is not indicative of future returns.” A great example of why this phrase is necessary occurred quite recently. In the 2000s, the common consensus was that “historical housing prices prove that real estate is always a great investment.” Even as housing prices soared, history kept people feeling safe. Then, in 2008, the housing bubble burst. The takeaway from this is that history guarantees nothing.
That being said, history does allow some level of evaluation. Since robo advisors have only existed for a few years, they have less history to evaluate them on. The little history robo investors can be evaluated on has largely occurred during a decade long bull market. Until a bear market occurs, it will be impossible to know how safe robo investing is during a bear market.
Data Safety
With almost daily news updates of major data breaches, it’s easy to understand why data security is top of mind for so many people. With new technology, especially technology people may not completely understand, many people’s first thought is the security of their data. Short of living completely off the grid, there is no way to completely secure data. Potential data loss or theft is the price of living in modern times. Some good news exists, though. In terms of data security, a robo investor is just as safe as any bank or financial institution.
The biggest risk to investor data is actually not through the robo investor. Data safety rests far more on the user’s end. No way exists to completely ensure the security of sensitive data, but a couple of ways do exist to help minimize risk. The first is to ensure that access to any sensitive information requires two-factor dual authentication. The second is to never connect to public Wi-Fi while accessing sensitive information. These two steps will not 100% guarantee data security, but they can certainly help minimize the risk.
So, How Safe Are They?
After reviewing the safety of robo investors compared to typical financial advisors, a few generalizations can be made:
- Human Error. Robo investors can help to remove some elements of human error due to emotional decision making by automating the investment process.
- Historical Safety. Though history does not guarantee a specific future, robo investing has almost no history to evaluate it on. They have largely existed only in bull markets.
- Data Security. In terms of data security, robo investing can be just as safe than as any other bank or financial institution. The biggest risk to investor data is actually on the user’s end, though ways exist for investors to minimize this risk.
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If you would like to discuss the benefits or any concerns you may have with robo investing, speak with an advisor from Good Life Financial today. We are proud to offer clients access to Guided Wealth Portfolios, a leading investment platform, combined with advice from real financial advisors.