In today’s ever-changing world of financial planning, the advent of robo-advisors has become more commonplace. Of course, there are advantages and disadvantages to the use of investment tools. In fact, before the introduction of this robo-advisors access to financial planning was more or less limited to the wealthy. That is one of the main appeals of these advisors is that most do not discriminate when it comes to how much you have to invest, though some do. So how do you tell which advisor is best for you? Here are a few things to consider when seeking out a robo-advisor.
Fees
First is how much will you pay? This is what initially sets robo-advisors apart from the human, financial planner, and that is the fees that they charge. Typically, a robo-advisor can charge as little as 0.25% of assets per year. That compares to 1.0% or higher fees that a human, financial planner charges for managing your assets. But as we will examine later in the post, a human though more expensive may be the better choice depending on the situation.
As I touched on in the beginning, robo-advisors may not care about how much you have to invest. This is where there is a dramatic difference from their human counterparts who may require a sum in the six figures to handle your money. Many accounts with robo-advisors can be opened with no minimum through one of the more popular robo-advisors, Wealthfront required $500 to open an account. I have written previously about the use of Acorns which links to your credit cards and your bank account to save the roundup amounts in a collection of Exchange Traded Funds (ETS) with a minimum of $5 to open an account.
So now you know the fees charged by the robo-advisor, and what it takes to open an account we will examine the other fees associated these accounts. As you just learned with the example of Acorns these robo-advisors typically use ETF’s for their investment choices for asset allocation and asset management. But these ETF’s have fees associated with owning them as well. Many are tied to an index and have fairly low fees such as a Vanguard S&P 500 index that has a management fee of just 0.03% when compared to an actively managed mutual fund where fees can be more than 2.0%. And as I have discussed fees matter when it comes to your account and compounding.
Diversification
Now we know that ETF’s are used and the fees associated with owning them. I also mentioned asset allocation and asset management through what is a fairly simple questionnaire. Depending on your answers it will determine what ETFs you will own and in what percentages. This allows these portfolios to be well diversified with owning as little as six different ETF’s. And most robo-advisor sites will post their fees, the fees of the funds they use and the portfolio mix which will allow you to shop their services to see if their portfolios and their mixture meet your risk tolerance and asset allocation needs.
Depending on how complex your financial situation is you may not be able to fully participate in robo-advisors. Many will not consider assets outside your account in the creation of your ideal portfolio. This means you may be taking on much more risk than you want to and your asset allocations may be severely out of balance. And many robo-advisors do not allow or can perform the technique of tax loss harvesting. By selling your losing positions, you can offset gains in other sales in the year that the sales occurred. That is provided you do not repurchase the same security within 30 days of the sale of the loss.
Drawbacks
Finally, if you desire to speak to a human to provide assurances, some robo-advisors do provide these services to higher net worth clients or those who may pay higher annual fees. Many will require higher account balances for the ability to speak to a human, financial planner, but a few of these hybrid robo-human advisors is out there. But if you are scared of investing in the first place robo-advisors may not be for you as a human, a financial planner is better for you to be able to speak to you and put you at ease when the markets are volatile, as they have been the past year or so.
While there are many benefits for the use of robo-advisors there are also some drawbacks as well as we have discussed. Yes, robo-advisors are extremely popular among millennials, but human, financial planners also have a place in most anyone’s financial planning activities. If you were to use a hybrid advisor or robo-advisors with human planners, you would be in good shape to take all of your financial interests into account, not just the assets in your robo-account. Financial planning is more than what most people think and finding the right one to work with is important.
For more information or if you have any questions, please feel free to leave a comment or contact me directly. For a free PDF on financial planning join my email mailing list on the form below.
