Robo-advisors are currently the hot thing in investing. Everyone cannot stop talking about the ability to use one a computer program for cheap to help them invest. You know what though? I see robo-advisors as mostly useless.
Financial Advisors have their Place
Let me first reiterate, I get why someone would want a financial advisor. Financial advisors are not for me given I have learned how to manage my own financial situation. However, I understand not everyone has the mindset to do so. To some the concept of managing their finances is too daunting. Others would prefer to spend their time doing something else. I respect that as well. Even though I spend hours each week writing about personal finance because I enjoy it deeply, I also understand that some people hate to think about money. Those are the people who should be using a financial advisor.
What do you get for your advisor?
What is a financial advisor really offering? If you get a good one and you properly vet them they are offering a holistic plan. This plan starts with what you value and want out of life. They work from there to encompass how to achieve those things. It captures the personal of the personal finance equation. Without that personal aspect, it is largely useless as your financial life should mirror what you personally value. It will do you no good to dump every dime into long term illiquid investments if you plan to buy a house next week. Conversely why would you keep everything in cash if you do not need the money until retirement. This is a simplistic example, but the personal in personal finance is infinitely complex. So, the first ding against robo-advisors is they cannot support infinitely complex. Sure, they can support some variations to support categories of people, but by their very nature they won’t capture all aspects of your personal situation.
The Limited Scope of Robo-Advisors
My concern/issues with robo-advisors does not end with the personal part of finance. The second issue I have with them is that they only cover one aspect of your plan. They take the thought out of investing. On the face of it that’s great and all, but what does this really accomplishing?
Goals, Spending, Earnings are not Managed by Robo-advisors
First your investment plan should be but one part of your overall plan. These robo-advisors completely ignore those other aspects of your life. Whether you invest in index funds and how frequently is important, but I would argue understanding how to get to your financial goals, control your spending, and increase your earnings are just as important. They are also interdependent, and yet robo-advisors ignore these areas of your life.
Investing for the Long Term is Easy
Second, the part that robo-advisors cover is the easiest part of your plan. Yes, you heard me right. Investing for the long term is easy. Really for most people their retirement accounts need only consider 3-5 investment choices. Those 3-5 investment choices would all be low cost index funds, split between your domestic market large cap, international markets, bonds, small caps, and potentially real estate. That’s really all, at least generically, anyone should need to retire. It’s all those robo-advisors are really doing.
Asset Allocation is the Hardest <sic> Part of Long term Investing
Sure, within those 3-5 there is also the decision on how much of each to buy. The thing is there is even a solution there. The first is just copy what the robo-advisor suggests. They are well publicized so it’s not that hard. Or you could ask someone. Once you set it you largely can forget it until retirement so it’s not that hard. Still perplexed? There is a category of funds called target date funds that will adjust the percentages for you. Pick up one of these funds and call it a day. Several of the ones from large companies like Vanguard cost a lot less than a Robo-advisor as well. After all, you are paying the robo-advisor for the tool plus the cost of the underlying funds. That extra drag on your funds adds up over time. Even an extra say .3% for a robo-advisor over 10 years on a million dollar portfolio would cost you almost $40K. Why spend $40K on essentially something you can do yourself in a few minutes.
Automatic Investing can be done without a Robo-advisor
The only other value besides choosing your stock allocation and underlying funds that a Robo-advisor brings is the ability to invest automatically. I have news for you. You can do this for free with options like your 401K, automatic withdrawals from your savings account to a brokerage, or any number of other options. Again, you are paying for something you could solve in a few minutes, set once, and never look at again. Anything but free here would be a colossal waste of money.
Ultimately if someone invented a robo-advisor that could weigh in on your entire life picture and give you advice on how to correct your situation holistically I would be in favor of them for certain types of people. As it is, I just see them as too simplistic to help those who need help and non value adding for those who already understand finance.
What is your take on robo-advisors? Do you use one? If so why?