I get loads of questions about the many options that exist in the investment universe. Many of which are to do with the “new internet FinTech companies” that’re out there spawnin’ like pregnant (male!!) seahorses.
“Should I use Ellevest?”
“Should I use Wealthfront?”
“Should I use Betterment?”
These are three of the most common questions I get asked. So, let’s talk about it.
First, understand that the real question being asked here is, “Should I use a robo-advisor? All of the above-mentioned services fall under the umbrella of financial technology (FinTech) called “robo-advisors.”
Yup, robo-advisors is short for “robot/robotic advisors.”
Now, this does not mean that R2-D2 be out there making investment decisions for you, although that would be pretty cool. Think of robo-investing as a computer investing your money according to a pre-determined set of rules, called an algorithm. (But, so we’re clear, a human created those algorithms.) Basically, you’ll tell them your age, your goals, your comfort with investing, and they’ll slate ya into an investment portfolio to match.
To be 100% clear ‘cause there are a jazillion new money apps/companies out there, a robo-advisor is not a budgeting tool like Mint. It’s not even a stock trading app, like Robinhood. On Robinhood, you choose your investments. When you “hire” a robo-advisor, they choose and manage your investments.
Robo-advisors are baby investment sprouts grown out of the demand for an investing service for the non-rich among us, those who can’t afford traditional wealth advisors—who are expensive AF and often have ridic minimums to utilize their services. Betterment and Wealthfront are the OG robo-advisors, there’s Wealthsimple (which you’ll see a lot of bloggers pushing because they’ll pay us), Learnvest, which is investing but with an emphasis on financial planning, and Ellevest, the robo-advisor that markets to women.
(By the way, I have no affiliate links on this page.)
Real-talk: A lot of robo-advisors are basically the same. Are there nuanced differences? OF COURSE. Will they perform slightly differently over time? Probably, but it’s impossible to know which will perform best. Therefore, choosing between most popular robo-advisors is more like the difference between Levi’s and Lee’s, not like, Banana Republic work slacks and assless chaps. Therefore, the more important decision for you, my sweet investing newb, is whether to USE a robo-advisor or NOT TO USE a robo-advisor.
What Exactly a Robo-Advisor Does
The most popular robo-advisors invest you in a mix of stocks and bonds using index funds. An index fund essentially buys you into a huge swath of the stock (or bond) market at a very low cost.
Most us finance geeks think index funds are a pretty great option. They provide cheap, easy access to the stock market. (If you’re already feeling lost, take a break and read this first.)
Really, there are two options for buying index funds: Either 1) you buy them for yourself, or 2) someone (the robo-advisor) buys them for you—and that’s pretty much the gist of what a robo-advisor does.
Therefore, the question that’s really at the heard of the robo-advisor decision: Should I hire a robo-advisor to buy me index funds, or should I just buy the index funds myself?
Let’s talk a little bit about what it’s like to buy your own index funds. Here are your responsibilities:
- Buy the index funds within your account—usually a mix of stock funds and bond funds. It’s best if these purchases are automated.
- Rebalance about once a year.
- Shift towards a “more conservative” allocation (more bonds) as you near retirement.
Just as these are your responsibilities if you buy index funds yourself, these are precisely the services you’d pay for if you were to use a robo-advisor. These are the services that they are providing to you, for a fee.
Most robo-advisors charge .5% for this service. This is on top of the fees you pay the index funds, which are called expense ratios. Expense ratios will fall between .01% and .5%.
To distill the question at the heart of the debate down even further: Is this too much in fees to pay for a service that is relatively easy to do yourself, once you learn how?
Expectedly, there’s extremist fringe on both sides of the debate. You’ll hear the haters say that “robo-advisors are a complete and total scam!!” Meanwhile, fanboys are yelling from the rooftops that “robo-advisors are the answer we’ve been waiting for and will save us all!!”
Unfortunately for those in the mood for *dRaMa*, I don’t subscribe to either belief. I’ll let YOU decide for yourself how YOU feel about robo-advisors. And anyway, I like the raisins in the trail mix so you probably shouldn’t trust my judgment anyway. So you can make an educated decision, here are some pros and cons or robo-advisors:
Pros and Cons of Robo-Advisors
1. Hands off
Robo-advisors are good for someone who truly wants nothing to do with managing their investments. Perhaps this person is either overwhelmed by investing (although, you should probably think twice about investing in something that you’re not comfortable with) or is willing to pay a premium to think about it as little as possible.
Most people will set up an automated contribution to their robo-advisor. Once the money is deposited, it is generally automatically invested. This is a good thing, as investors should aim to spend the maximum amount of time in the market. When you’re doing it on your own, it’s easy to thumb-twiddle or get cold feet or just plain forget to invest the money.
3. Upkeep is done for you
As mentioned, you are paying for someone to invest you in funds. When you invest in funds, a small amount of upkeep is required each year to make sure yo’ shit is straight. This is called rebalancing. Robo-advisors rebalance for you, to make sure that your investments are “as they should be.” For example, if they’ve decided that you should be invested in 80% stocks and 20% bonds, they’ll adjust the mix back to 80/20 any time that your investments grow unevenly.
*FYI, the stock vs. bond decision is the most important investing decision. Read more about it here.
Second, robo-advisors will slllooowlyyy shift you into a more conservative (bond-heavy) allocation over time. For most of you, this won’t be for decades, but yeah, that’s one service they provide.
3. It’s better than not investing
If using the help of one of these services is what will inspire you to take to get invested, then you should do it. Investing with a small fee is DEFINITELY a better option than not investing at all. PERIOD. If this is what speaks to you, then go for it.
4. People suck at investing…
…Even when it’s simple as “buy an index fund.”
And it’s not our fault! Our human brains aren’t hardwired to be good at investing. For example, when the market goes off the rails—which is actually a normal, natural part of stock market cycles—our brains activate our “fight or flight” mechanisms. We are chemically driven to “do something” and “fight back” when in reality, the best thing we can do is chill the fuck out and stay the course.
Here’s the thing; we don’t know yet if robo-advisors are going to help people to be better investors. It’s hard to measure. We have yet to go through a really bad market with robo-advisors—they are that new. Will they help investors stay the course? Can they help investors stop from doing harmful things? It remains to be seen!! But I hope that they will.
A lot of personal finance experts miss this point. Like, yes, I am going to be a good stock market/index fund investor because I have personally steeped in this information for long enough that I am confident in my abilities and know how to avoid all the whack, hidden fees. But, most people haven’t, and don’t. If robo-advisors have the ability to keep people on track who might otherwise hurt themselves while investing on their own, then the fees are definitely worth it.
5. Tax-loss harvesting
So basically, tax-loss harvesting is selling investments at a loss to offset investments sold at a gain, so they cancel each other out and you don’t owe any taxes on investment gains. Pretty nifty, but for most young investors investing for the long-term, IT’S A MOOT POINT. That’s because most young investors are doing so within a retirement account, where you don’t pay capital gains tax (that’s why retirement accounts rule so hard), and therefore tax loss harvesting isn’t needed.
This may be important to someone that has maxed out a 401(k) and has tons of taxable money to invest.
5. Ask questions to a Certified Financial Planner
Most all robo-advisors are offering support for their investors, whether it’s online or over the phone. This is good for people who are learning, who get skittish about investing, or just want a voice on the line.
You’re paying to do something that, I’m being serious, isn’t technically hard to do on your own.
As mentioned, most robo-advisors charge a .5% fee. That’s one-half of one percent. This sounds like nothing, right? Like I’d be straight-up offended if I went to a happy hour and they offered “.5% off of all beers!” Thanks, motherfucker, but I’d rather just pay full price. Well, in the world of investing, .5% is actually kind of a lot.
But don’t take it from me, let’s look at the numbers. Imagine someone who is investing $1,000 per month for 40 years, earning a 7% rate of return. How much would a .5% fee amount to, over time?
The difference of over $260,000!!! .5% don’t seem so innocent no more, huh?
2. You can learn how to do this on your own
Robo-advisors provide a service that you could very feasibly do for yourself. Literally, they buy you some Vanguard ETFs. That’s what they do, and you can do it, too.
(Want to go into the decision feeling smart and confident? Take my Invested Development course.)
If buying multiple index funds is not something you’re interested in, you could also:
3. Get the same service by using a Retirement Target-Date Fund
Ever seen a fund with a funky date on it, like 2050? That’s a retirement target-date fund. The first step to using a target-date fund is to pick your approximate retirement year.
This is a single fund that you invest in that holds other funds. So, for example, a Vanguard Retirement Target Date Fund 2050 holds two stock index funds and two bond index funds, in a mix that’s 90% stocks and 10% bonds.
A retirement target-date fund will both rebalance your funds and move you into a more “conservative” (bond-heavy) allocation over time. So basically, the same exact services a robo-advisor charges for, but for little/no additional cost.
So, if you want a one-stop option that offers low-cost index funds, charges a very minimal additional fee, and takes care of itself (annually and over the long-term), then a target date fund might be your silver bullet.
That said, not all retirement target date funds are created equal!! Some are funds that hold more expensive managed funds, and some are funds that hold index funds (like Vanguard) and charge very little extra beyond the (low) expense ratios of the underlying funds. If you go this route, know what kinds of funds are inside your retirement target date fund!
4. Less control
If you want to build your own portfolio, then a robo-advisor isn’t for you. The whole point is that you are giving them the reins to them to invest you in a passive approach.
5. Your 401(k) might be a better option
Robo-advisors aren’t usually compatible with your workplace’s 401(k) (or other workplace retirement) plan. And for most of you saving for the long-term, this is the place that you may want to start. This is especially true if you have any sort of company match. Therefore, you’ll need to invest in whatever options provided by your 401(k).
6. People still don’t understand the stock market
Just because a service is investing you in funds doesn’t mean you’ll be a good investor or feel totally fine during the next shit market. I still think there’s a massive problem with the lack of education surrounding the stock market, even with robo-advisors. No matter what methodology you use to invest, you have to be emotionally, mentally, and spiritually prepared for the next bear market.
It is better to get yourself into the market—at as young an age as possible—than it is to sit with your thumb up your ass because you don’t know where to start. (As long as you are committed, even during the bad times.) If that means paying some money to a service that will help you do it? Then fuck yeah, do it.
That said, you can learn to do this on your own, and to be honest, you friggin’ SHOULD learn the mechanics EVEN IF you use a robo-advisor. You need to understand how and why you’re invested. I remind you with a hug and a kiss: this is YOUR FUTURE that we’re talking about here. This is your garden. This is your job. It’s worthy of your effort.
If you’re willing to commit a few hours to learn how to do this on your own, then take my Investing 101 course, called Invested Development. It’s $199—compare that to the $260,000+ (or more) you could pay in fees over time to have someone do it for you. It’s live, taught by me, and you’ll finally feel like you really get all of this stuff!! Be the confident, investing badass that you know that you can be <3
This post is for entertainment purposes only and does not constitute financial advice. Please consult a certified professional with any questions. For more, read here.