Robo-Advisor or Personal CFO? Here Are the Key Factors to Consider

Tuesday, October 16, 2018

Cheaper isn’t always better, especially when it comes to choosing someone with your best interests in mind.

By Bryce Baker, CFP® and Michael Stubel

Part of successful financial planning is avoiding unnecessary expenses. But should you sacrifice the quality of your financial advice in favor of a less expensive alternative?

Robo-advisors are growing in popularity because of their low investment costs and advanced algorithms that seemingly simplify the investing process. However, choosing a lower-priced option over a service that potentially provides more value could cost you in the end.

While robo-advisors can be a suitable option for some individuals and families, it’s important to be mindful of your needs and understand the best model or relationship for your financial picture and life stage.

Let’s explore the key differences between a robo-advisor and our Personal CFO approach and how this decision can ultimately impact your financial strategy.

What Is a Robo-Advisor?

Put simply, a robo-advisor is digital technology’s solution to financial advising.

Robo-advisors use an algorithm-based approach to financial planning that involves little to no human interaction. Rather than working with a human financial advisor, your plan and ongoing advice come from an automated service that relies on surveys and data collection, and then presents financial information based on your responses.

Robo-advisors are growing in popularity because of their low investment costs and advanced algorithms that seemingly simplify the investing process.

Robo-advising is a growing trend in today’s digital era and provides cost-effective access to a diversified allocation.

What Is a Personal CFO?

The term “financial advisor” isn’t obsolete, but Personal CFO is a more fitting description for the advisor who works across all aspects of financial planning.

You are the CEO of your life, and every CEO needs the strong backing of a CFO to help in shaping a financial strategy.

As my colleague Matt Camrud, CFP® put it, a Personal CFO “works with clients to see the big picture—their total balance sheet and how everything works together … We also painstakingly catalog and analyze every detail, understanding how each component fits into the broader, holistic plan. As fiduciaries for our clients, we have a legal obligation to act in their best interest, and we believe the best way to fulfill this obligation is to serve as a Personal CFO and embrace a truly comprehensive approach.”

The Personal CFO brand transcends the more common financial advisor role in that it entails more than just “advise.” Remember, not all advisors are fiduciaries, and taking the business partner approach in your personal finances can prime you for greater success.

What to Consider Before Choosing Between a Robo-Advisor and Personal CFO

Partnering with either a robo-advisor or Personal CFO isn’t a decision to take lightly. It’s your or your family’s financial wellbeing at stake, and hiring any type of professional ultimately comes down to two considerations: cost and value.

Cost is straightforward enough—it’s determined by the established price of a service or job.

Value complicates the decision-making process because it is subjective. For example, what is the value of hiring a driver in a foreign country versus renting a car for less and driving yourself? Five different people may have five different answers to the same question.

Personal CFOs often act as behavioral coaches to guide you along the way, serving as both sounding boards and sources of discipline.

As a result, cost isn’t always the most important factor when deciding between a robo-advisor and Personal CFO. You must also determine the value of what you get for the price you pay.

Asset Allocation and Broad Diversification

Diversification is critical to your investment success, but there’s more than one way to allocate assets. A Personal CFO works to protect several years of your projected cash needs, allowing you to cover your monthly needs while also dampening the overall volatility of the portfolio and ensuring that there is an adequate time horizon to experience any market corrections.

Asset Location

A Personal CFO focuses on getting you the best after-tax returns on your investments. For example, it’s critical that tax-inefficient investments—those that generate a lot of dividends and income—are held in your retirement accounts when possible.

Behavioral Coaching

Creating a barrier between investors’ emotions and their long-term financial goals can reduce the risk that you will make any emotional decisions during times of turmoil. Personal CFOs often act as behavioral coaches to guide you along the way, serving as both sounding boards and sources of discipline.

Portfolio Rebalancing

Using a systematic approach to rebalancing your portfolio can help you control your risk over time rather than experience wild, unexpected fluctuations. Understanding how differently robo-advisors and Personal CFOs approach portfolio rebalancing can reveal some of the real benefits of the “human touch.”

For robo-advisors, much of this work is automated through the use of an algorithm. Personal CFOs, on the other hand, set strategic sub-asset class targets and rebalance around those. Any changes are made based on the advisor’s understanding of your upcoming cash needs and life planning.

Spending Strategy and Withdrawal Order

Lacking professional guidance when you need funds from your portfolio can be a deeply stressful experience. Where should the funds come from? In what order should you withdraw funds? Not all asset classes are well-suited for cash needs and having a clear framework from your Personal CFO on spending and withdrawing can help you maintain a healthier portfolio.

Total Return vs. Income Investing

Ultimately, you want to get the best possible return on investment, regardless of which strategy you choose. In many cases, individual investors operate under the notion that they should only spend the income generated by the portfolio, but this approach could be short-sighted. Opting for a total return approach can mitigate risks while also providing cash flow from multiple sources.

Conclusion

The lowest cost shouldn’t be your sole determining factor when choosing a financial advising service, whether it be a robo-advisor or Personal CFO. While robo-advisors may save you a little on some of your frontline expenses, such as portfolio construction, forgoing value-driven aspects like personalized coaching could end up costing you more in terms of ROI.

At Brighton Jones, we’re always happy to guide you as you explore and vet other options before you commit to a strategy. You owe it to yourself as the CEO of your finances to carefully research your options, and as your Personal CFO, we can help you understand which questions you need to ask to make an informed decision.

Bryce Baker, CFP® serves as an advisor at Brighton Jones. Michael Stubel is the content marketing manager.

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