Robo-Advisor: Should You Use One? Pros and Cons (+ Tips)

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You may have heard of “robo-advisors” like Betterment and Wealthfront. Robo-advisors are investment firms that use computer algorithms to invest your money (“robo” refers to a computer investing for you versus an expensive advisor).

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You are probably wondering if they are a good investment and if you should be using one. As the NYT best-selling author on personal finance, let me break it down for you.

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Why did robo-advisors become popular?

Robo-advisors took the specialized financial planning services offered to clients of financial advisors and full-service investment firms like Fidelity and made them accessible to the average person.

You know how Uber made private cars more accessible and convenient than taxis? Robo-advisors have done the same for the investment industry.

Robo-advisors apply new technology to offer investment recommendations for a low fee. They improved the user interface so you can sign up online, answer a few questions, and know where to invest your money in just minutes.

And they’ve personalized the experience so you can add to your goals—like when you want to buy a home—and automatically allocate funds for it.

Are Robo-Advisors a Good Investment?

I have a strong opinion on robo-advisors:

While they are good options, I don’t think they are worth the cost, and I believe there are better alternatives.

As an example, I specifically chose Vanguard and have been with them for many years.

Tell me about the pros and cons of robo-advisors so you can make your own decision.

The Pros and Cons of Using a Robo-Advisor The Pros and Cons of Using a Robo-Advisor

Over the past few years, robo-advisors have become increasingly popular for three reasons:

ease of use. They have beautiful interfaces on the web and on your phone. They offer low minimums and make it easy to transfer your money and start investing.

low fees. In general, their fees start out lower than those of full-featured investment firms such as Fidelity and Schwab. (Those firms quickly sensed their competition and reduced their fees accordingly, while low-cost firms such as Vanguard’s fees have always been lower.)

Marketing Claims. Robo-advisors make a lot of marketing claims. There are some truths, such as their ease of use. There are some absurd, which are absurd, such as their focus on “tax-loss accumulation.”

As you’ve probably realized if you’ve read any of my other blog materials on personal finance, I’m a huge proponent of anything that expands the use of low-cost investing to the masses.

Long-term investing is an important part of living a prosperous life, so if companies can remove the complexity and make it easier to start—even typically charging less—I’m a fan. .

These robo-advisors have added exceptional features that are really helpful, including planning medium-term goals like buying a home and long-term goals like retirement.

Plus, you can often tell how good something is by someone who hates it.

For example, Bank of America hates me because I publicly call them out on their crap. Good! In the case of robo-advisors, commission-based financial advisors usually hate them because they use technology that many advisors were doing — but cheaper.

The counsels’ argument on this is not particularly compelling. Financial advisors essentially say that everyone is different and that they need individual help, not one-size-fits-all advice (false; when it comes to their finances, most people are the same).

Robo-advisors have responded by adding financial advisors you can talk to on the phone. Traditional financial advisors say that their advice provides value beyond just returns. (My response: OK, then charge by the hour, not as a percentage of assets under management.)

Robo-advisors emerged to serve an audience that was previously ignored:

Young people who are digitally savvy, upwardly affluent, and don’t want to sit in a stuffy office just to get lectured by a random financial advisor.

Think of a Google employee who doesn’t know what to do with his money, who is just sitting in a checking account. Robo-advisors have done a good job of engaging the audience.

But the real issue here is “Are they worth it?”

My answer is no—their fees do not justify what they are offering. Most popular robo-advisors have great user interfaces, but I’m not willing to pay for it. Since they opened, many robo-advisors have dropped their fees, sometimes less than Vanguard.

The problem with robo-advisors

But there are two problems with this: To run a sustainable business at less than 0.4 percent fee, they have to offer newer, more expensive features and manage vast amounts of money—we’re talking trillions of dollars.

As an example, Vanguard currently manages nine times more assets than Betterment and ten times more assets than Wealthfront. That’s a huge competitive advantage for the huge, massive Vanguard, which has built itself up over the decades to sustain itself on small part-per-cent fees.

New robo-advisors can’t survive those low fees unless they grow their business rapidly, which is unlikely. Instead, they’ve raised money from venture capital investors who want rapid growth.

To attract more clients, robo-advisors have begun to use marketing gimmicks, such as highlighting a small portion of an investment, “tax-loss harvesting”—which is basically selling such an investment. That’s down to offsetting tax benefits – that they blew into a seemingly significant portion of an account.

Why Is Tax Loss Harvesting Not So Important?

It would be like a car manufacturer spending millions of dollars marketing a triple coat of paint as one of the most important parts of buying a car. Sure, tax-loss harvesting can save you a little money in the long run. , , But not much.

And in many cases, it is unnecessary. This is a “nice to have” feature, but hardly something you should consider when making the crucial decision of choosing which firm to invest your money in.

Some robo-advisors have even begun offering products with higher fees, as the Wall Street Journal reported in 2018.

Wealthfront added a high-cost fund of its own. The offering uses derivatives to replicate a popular hedge fund strategy called “risk-parity”.

Some clients—joined by consumer advocates and rivals—quickly took to online forums to criticize the cost and complexity of the fund. They also employed Wealthfront to automatically enroll certain clients into the fund.

“I just saw my account and it’s true. Money was transferred to your ‘Risk Parity’ fund without my consent,” Wealthfront customer Cheryl Ferraro, 57, of San Juan Capistrano, Calif., recently posted on Twitter.

“I had to go to my account and tell them that I wanted my money to go out of that fund. It definitely shook my confidence in them,” Ms. Ferraro said in an interview.

This is the expected result when a low-cost provider raises venture capital and needs to grow rapidly. It either finds more customers or finds a way to earn more money from each customer.


I believe Vanguard has an edge, and I invest through them.

But realize this: By the time you’ve narrowed your investment decision down to a low-cost provider like Vanguard or a robo-advisor, you’ve already made the most important choice: to start growing your money over the long term, low. cost investments.

Whether you choose a robo-advisor or Vanguard or another low-fee brokerage is a minor detail. Pick one up and move on.

Pick one up and move on!

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