Investing: Should You Use a Roboadvisor?
Ever wish you could get started with investing, but you felt like you needed a financial advisor to help you figure it all out?
Thanks to technology, people are turning less to human advisors and relying more on
INVESTMENT ADVICE AND MANAGEMENT: THEN
Investing used to revolve around the relationship between individual brokers and investors. Brokers would buy and sell on their client’s behalf because the average person could not easily access these investment products on their own. As such, brokers usually charged based on commission. A broker that is paid straight commission could potentially recommend trades that would benefit them more than it would benefit their client. Unfortunately, there was little the investor could do to work around this system.
INVESTMENT ADVICE AND MANAGEMENT: NOW
People can now set up and direct their own investments through online brokerage firms (such as Vanguard, Charles Schwab, and Fidelity). This setup has basically eliminated the individual broker that used to act as the middleman between the investor and their investments. As a result, anyone can become a DIY investor.
However, many people are not comfortable going at it alone, so they seek out financial advisors when it comes to investment advice. This makes
Financial advisors are typically compensated through
Financial advisors are changing their business models and are becoming more and more available to people across all income levels and life stages by moving away from the AUM fee structure. They are bundling in financial planning in addition to investment advice, which would include areas like budgeting/cash flow, insurance, taxes, and estate planning. You can read more about financial advisors here.
But let’s face it, we’re in the digital age, and people want the ability to do almost anything from the comfort of their laptop while still in their pajamas. This includes investment advice and
WHAT IS A ROBOADVISOR?
Simply put, a roboadvisor is a service that uses computer algorithms to pick and manage your investments. The two best known roboadvisors are Betterment and Wealthfront. The number of roboadvising companies and services is rapidly growing and continually evolving in order to meet the needs of beginner investors.
As with any service, especially one that is growing so quickly, it will do you well to take some time and research your options before making a commitment. Here are some factors that you need to take into account when making your decision.
As I mentioned in this post, automation is beautiful. It leaves you time and mental space to do other things in your life that bring you more joy. Roboadvisors automate your investing by:
- Building an investment portfolio based on your time horizon and risk tolerance. This all starts with a simple questionnaire.
- Managing your portfolio through rebalancing, which means that it will adjust your asset allocation over time to fit your investing goals. You can read more about asset allocation here.
- Tax-loss harvesting in order to offset losses for a tax benefit. Who doesn’t like a tax win?
If you have a good grasp of how investing works as a part of your overall financial plan, then you will appreciate the automation that is provided through roboadvisors.
However, there is a downside to automation. When you use the “set it and forget it” method without regularly checking in, then you could end up with results that don’t reflect your money and life goals, which will inevitably change over time. Investing as a young, single new graduate versus investing as a mid-career veterinarian who is married with dependents will look different.
No matter what you choose to automate in your day-to-day life, whether it’s your personal financial system, ordering through Amazon Prime, or buying your groceries through a delivery service, you still need to evaluate your automation system on a regular basis and change it if it no longer fits your current lifestyle and personal goals.
Some roboadvisors offer a hybrid service where you also have access to a human financial advisor. You will be expected to have a higher minimum to qualify for this service, and/or it will require a higher fee.
LOWER ACCOUNT MINIMUMS
The minimum amounts to get started will vary, but they are generally MUCH lower than what you would need with a traditional financial advisor. Some roboadvisors even have a $0 minimum. No longer can someone use the excuse of not having enough money to invest.
Many human advisors working with an AUM fee structure require a high minimum in order to work with them. The minimums can easily be in the six-figure range. This had previously been a big barrier to getting started with investing, and more and more people are questioning why those with substantial assets should have the privilege of getting investment advice while those with negative or little assets (such as a new grad with
These percentages may not seem like a lot, but after reading this post, you’ll see how powerfully compound interest can make those small percentages add up to substantial amounts over time. Seeing these numbers is why so many people opt to go the DIY route and manage their own investments.
The lower your assets, then the
RANGE OF INVESTMENT ADVICE AND MANAGEMENT
Although roboadvisors can set up an investment portfolio for you, they can’t necessarily manage ALL of your investments. Investing doesn’t only refer to your typical brokerage/taxable account. Remember that you are also investing when you have a workplace retirement plan, such as a 401(k). Some services will help you manage your 401(k) (this is Blooom’s speciality) while others will not.
Don’t forget about owning bonds, CD’s, IRA’s, and college savings plans, such as 529 plans. You may have real estate or business investments. The more investments you have, the less likely a roboadvisor can manage your entire investment portfolio.
NEW KID ON THE BLOCK
The field of
How roboadvisors will fare through the next recession remains to be seen. Will their clients stay the course, despite volatile market conditions? Will their portfolio strategies hold up? Only time will tell.
DIFFERENT FUNDS AND STRATEGIES
INVESTING IS A PIECE OF YOUR OVERALL FINANCIAL PUZZLE
Your financial situation is like a puzzle with many moving parts. Your investments are just one portion. If your investments don’t match up with the other parts of your plan, then you’re not optimizing your finances. Remember, you’re working really hard for your money, and you want to make sure that your money is working hard for you, too. You want to be certain that by focusing on investing, you’re not losing sight of your whole financial picture.
When looking at all of these factors, it’s clear that even if you want to outsource your investment management in order to stay relatively hands-off with your investments, you will still need to put in some time and effort into choosing the best roboadvisor for YOU.
In short, a
- You’re young with a long time horizon ahead of you
- You don’t have much in assets and you just need to get started
- You’re only looking for investment management, not comprehensive financial planning
- You don’t have much interest in being a DIY investor
- You don’t mind paying the extra fees for this service
- You understand the importance of investing during market downturns and you’re confident that you will stay the course with your investment plan.
On the flip side, roboadvisors may not make sense if:
- You are nearing retirement
- You have substantial assets
- You need more comprehensive financial planning
- You want to be more hands-on with your investments
- You don’t want to pay extra roboadvising fees
Investing doesn’t have to be difficult; in fact, it’s often said that boring is better when it comes to investing. So don’t discount the fact that you can absolutely learn to DIY
Ask yourself: “What are my investment goals? Will a
Are you thinking about using a
Great summarized pro-con list at the end there! I was curious about Betterment when MMM posted about it. Then they upped their fees with very poor communication, so I became less interested. Ultimately, for me it comes down to fees. VTSAX has a cost of 0.04% and I have a Fidelity index at even less than that. Why pay more, especially when I enjoy keeping an eye on things personally? But I understand to many people that is not fun. 🙂
Investing isn’t fun?? 😉 I hope that the pro/con list helps people decide whether a roboadvisor is right for them. As long as you have even the slightest interest in investing, there is a platform for you!