Date: September 13, 2021

What You May Not Know About Robo Advisors and Target Date Funds

The initial enthusiasm for something new is sadly often followed by disappointment when more facts come to light. In the investment world, two items that have become popular in the last decade are target date retirement funds and robo advisors. Each promised to provide cost-efficient investment management and superior results. But what has become clear is that whatever their merits, these two methodologies have a number of flaws that require careful consideration.

This is especially true when it comes to high net worth individuals!


As their name implies, robo advisors are not human. Instead, they are computer algorithms that manage your portfolio. In particular, robo advisors select investments, usually Exchange Traded Funds (ETFs), automatically rebalance your holdings, and harvest tax losses.

Target date funds are the most popular investment choice for 401(k) participants, served up mostly by the big mutual fund companies that operate on a similar principle, assuming that one needs to take moderate risk in their retirement planning and thereafter. In the most basic sense, these funds migrate your investments from stocks to bonds and cash as you age.

What could go wrong with these seemingly simple advances? Let’s count the ways …


Robo Advisors Use Automated Strategies Aimed at Ordinary Investors

According to a recent report, 3.5 million investors in the U.S. will use a robo advisor to handle their portfolio this year alone, a 23 percent increase from last year.

As a financial advisor in Woodbridge, CT, I will admit that robo advisors do help take the emotion out of the investment decision. Robo advisors trade according to the cold logic of computer programs, which is a supposed safeguard against investor overreactions stemming from fear and greed. However, the automated strategies used are aimed at ordinary investors, giving them a plain-vanilla character. While this may make sense from a marketing viewpoint, it isn’t very responsive to the needs of high net worth investors, or anyone whose situation varies from the norm.

Is your situation ordinary?


Schedule a no-obligation conversation with the team at Heritage Capital to see how we can help.


They Lack Personalization

High net worth investors (and anyone who wants to become one) often need highly personalized investment advice that takes into account their unique circumstances. Robo advisors have no understanding of an individual’s goals, commitments or challenges – because they’re not human. They make investment decisions for the masses from a limited, one-size-fits-all menu of choices.

If you want an entirely hands-off approach and a portfolio based on market indices, then robo advisors and target date funds may be right for you. If not, it may be time to switch advisors!


Service, Not Guidance

At Heritage Capital, we encourage questions! In fact, if you have a question about robo advisors or target date funds that isn’t addressed here, contact me directly and let’s talk!

When it comes to your investments, it’s important to understand the choices you make and the strategies you follow.

Furthermore, in my more than 30 years of experience as a financial advisor in the New Haven area, many high net worth individuals take an active involvement in their investment decisions, and one of the benefits of personalized service from a human advisor is the opportunity to kick around ideas, ask questions and seek advice.

This is an important part of the process. It’s crucial that your financial advisor understands the context of your investments, your attitude toward risk and the implications of your asset allocation strategy.

In fact, I believe that one of the most important roles a financial advisor assumes is helping clients make decisions, guiding them in their financial journey and helping them step back from the daily volatility of markets and instead concentrate on the long-term benefits of their investments.

Robo advisors don’t offer advice. They make trades as they see fit. Robo advisors offer a trading service based upon their latest software update. Personalized guidance, unfortunately, is not in the picture.

The few times I’ve been asked about robo advisors, I ask a few questions of my own: What has a robo advisor told you about when to retire, how much you could afford to spend, when to file for Social Security, if you should downsize or move, if you should reduce your investment risk after a decline or add more – these all very important questions. The response is generally a wide-eyed look of panic. Obviously the robo advisor didn’t address any of these big concerns.

As for target date funds, they are set for mediocrity. They are based on 40 years of data where interest rates only went down on balance. There is a basic premise that bonds are more conservative than stocks and will continue to deliver when rates and inflation go up. I think that’s one of the biggest risks to retirees: They have no idea how much they could lose from bonds when rates go up (and up and up) with inflation!


Target Date Funds Don’t Address Life in Retirement

Another common oversight of target date funds is that they hinge their asset allocations on a retirement date alone. They offer a glidepath to a final allocation based upon a date. Clearly, they have no means of addressing your post-retirement needs, which may be very poorly served by the final structure of a target date fund.

If you use a target date fund, it’s important to know whether it will protect you against inflation for the decades following your retirement, much less offer you the returns needed to fund an active post-retirement lifestyle.


Not All Target Date Funds are the Same

Another misconception about target date funds is that they’re all the same. That’s not the case. Just look at how the various target date funds performed in 2008. Many investors were unpleasantly surprised.

Typically, a target date fund consists of holdings in several in-house mutual funds. Your returns are conditioned upon the success of the fund family’s investment prowess and decision making when it comes to asset allocations and portfolio rebalancing.

Pick the wrong fund family and your investments can underperform.


Target Date Funds Don’t Consider Other, Outside Investments

The idea behind target date funds is for you to place all your investments there because they determine the “optimal” asset allocations for you. If your portfolio is partially invested outside the target date fund, then you’ve defeated the target date fund’s asset allocation strategy.

For maximum effectiveness, target date funds are an all-or-nothing proposition.



Robo advisors and target date funds offer investment strategies for the average, hand-offs investor.

This may be a perfectly fine strategy for you, but for most high net worth investors, these strategies are too narrow and impersonal. They don’t account for the special needs these investors have or offer the type of broad, customized service only available from a living, breathing financial advisor.

The team at Heritage Capital has been helping people retire with confidence for more than 30 years. We use active investment management and comprehensive financial planning to help you control your risks, so you can have a successful retirement no matter what happens with the markets or your world.

If you’re looking for a financial advisor who takes a hands-on approach, schedule a no-obligation conversation to see how we can help.

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Paul Schatz, President, Heritage Capital