Caveat Emptor – Buyer Beware

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Welcome to the first monthly Kashani Financial Services Blog. Here we will discuss topics in the world of finance that affect everyone.  In this blog we discuss the ever-changing financial landscape. These changes are brought on by numerous factors.  Among these factors, one of the most obvious is the change brought on by the advancement of technology. In this day and age we are seeing more and more industries changing, replacing humans with automated processes or machines.  While it is driven by the omnipresent need to increase productivity, it is seen as displacing the human element.  However, there are tangible benefits to this automation, such as the creation of jobs that didn't exist prior to these advancements.  We cannot ignore or accept these changes without first giving them serious consideration. These changes, as all things do, require a careful eye and a nuanced approach.  I will be looking at these changes from the lens of a financial advisor, and how these changes affect the financial industry as well as your investing habits.

One of the biggest examples of these changes comes in the form of the “Robo-Advisor”, which is a computer that selects and purchases investments for you.  These tools basically use algorithms to quantify what is best to invest in, however it often seems that what is best is usually what is safest.  While this is clearly a two-dimensional approach to wealth management, and is absent of an all too important human investor, the problem that I will be looking at today has less to do with this and more to do with the humans behind the scenes pulling the strings.  

Companies such as betterment, Schwab Intelligent Portfolios, and Wealthfront just to name a few are offering Robo Advisors to consumers.  With the already taxing nature of work and family life, it can be too time consuming for some to really understand what these Robo Advisor’s are really doing with their money.    

When talking to clients we often hear that the internal debate that occupies their mind is, “Do I use a financial professional, do I do it myself, or should I use a Robo Advisor?”  Either way when purchasing a product most of us do research to determine if this is the product you want to buy.  Purchasing investments product/services is no different.  With a subject as complicated as investing it is a bit more difficult do your own research than with something like buying a car.  Allow me to shed a little light on the Robo Advisor as a consumer product offered by a company like Betterment. The cost of hiring Betterment is currently .25% for the digital service and .40% for the Premium service but require a $100,000 account value.  Your investment options are limited to exchange traded funds (etfs) only.  That means you cannot purchase individual stocks, like Visa (a).  There are over 15,000 stocks in the U.S.

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While there are somewhat standard limitations of Robo Advisors, a concerning a limitation of a company like Betterment that I believe you should be made aware of is they reserve the right to halt trading across their platform at any moment.  Essentially this means that you cannot exchange your investments into cash.   Liquidity is the ability to readily turn investments cash.  Illiquidity is the inability to access that cash on demand. Investing money into a product that reserves the right to unilaterally take liquidity away is an additional cost that is hard to quantify.  By this I mean that only when such an event actually occurs, will you know what the additional cost is.  Maintaining your liquidity is a regulatory standard that financial advisors are obligated to uphold.  Some investments have years of illiquidity before consumers can access cash; but for Betterment to be able to restrict liquidity completely, depending on what they believe is “best” for the client is something that I find hard to swallow.  I want to leave you with one final real-world example, when betterment made such a decision to the detriment of their customers.    

In 2016, amidst the surprising results of the Brexit vote the market became unusually volatile.  During this market volatility, many people placed trades to either avoid losses or capitalize on the situation.  However, Betterment’s customers were declined this opportunity, with no notice until after the fact.  They alerted their customers that they halted trading in order to protect their customers, but many criticized the company for treating their customers like children.  When they received this criticism, they responded by noting that they would alert their customers sooner in future situations, but stood by this decision.  This is where we reach the key issue, Betterment and services like it may offer some sense of security to their customers, but the cost of that security is freedom.