There are pros and cons to this decision. A smart investor will consider both.
Robo Advice, for those who aren't familiar with the term, is a way to turn investment decisions over to a computer algorithm, thus eliminating the tedious work of making decisions for yourself or paying a living, breathing advisor to make them on your behalf for a higher fee.
Robos have been around for about ten years, which gives us a track record of sorts and allows us to compare the success or failure of various Robo operators. As you might expect, some operators are better than others.
Performance for the first 6 months of 2020
- Wealthsimple: 0.4%
- SigFig: -0.3%
- SoFi: -1.8%
- TD Ameritrade: -2.8%
- E*Trade: -3.0%
- Vanguard: -3.3%
- Ellevest: -3.3%
- Fidelity Go: -3.3%
- Wells Fargo: -3.3%
- Betterment: -5.4%
S&P 500 index: -4.0%
Comments on performance
Six of the ten Robos produced similar returns of around -3.3%. This was due to their adherence to a strict 60-40 stock-bond allocation. That was better than the S&P 500 return of -4.0% because the bond allocation paid off in the first six months of 2020. Will this keep up in the second half of the year? Who knows?
There is a risk that bonds may not offer the same price improvement and equity protection in the second half of 2020. In that case, the preferred 60-40 split may not work as well as it did in the first half of this year. As the carnival barker says, "Ya pays yer money and ya takes yer chances."
The Pros
Low account size minimums. Some Robos will take accounts as small as $1,000 or $2,000. Traditional brokers usually require $25,000 or more to open an account. (Betterment has a $100,000 account minimum, but that's unusual.)
Low costs. From nerdwallet: "Robo-advisors are much cheaper than an-person human financial advisor. Most companies charge between 0.25% and 0.50% as an annual management fee, though there are even free options like Sofi Automated Investing." Most Robos do not charge transaction fees, while most brokers do.
Quick start-up time. Robo-advisors let you get started investing quickly — in many cases, within a matter of minutes. If you've ever opened an account with a traditional broker, you know how daunting the process can be.
Rebalancing is done for you. Set it and forget it. This has great appeal for many investors. It's almost like owning your own Target Date Fund.
Tax-loss harvesting. This service is not unique to Robos, but the ones who don't offer this feature should be avoided.
For busy people, or those who don't want to be bothered with the minutae of managing their own money, Robos are a good solution. But the performance of your Robo account will only be as good as the asset allocation you decide to use.
The Cons
Loss of control. One thing is certain when you turn your investments over to a robot, and that's the fact that you give up control. But isn't that the whole point?
This can be a good thing for busy people, or for those who don't have the interest or skills to make their own investment decisions. It's not such a good thing for investors who want to maintain at least some control over their investment choices.
Lack of individual attention. This is a big one. When you need help, you will probably be sent to a call center where the handler reads from a script, based on the nature of your problem or question. Robos have to keep their overhead low, and personnel is the first place they look to cut costs.
Lack of flexibility. You get what you pay for, or in this case, you get what your account size justifies. Personal Capital offers help and support from human financial advisors, requires a $100,000 minimum balance and charges 0.89% per year. Clients receive financial planning services and investment management.
How skilled and experienced are these adviors? My guess is that many of them couldn't quite make a go of it in the traditional advice realm and ended up in a fancy call center.
The Robos are here to stay
Robo Advice is not a passing fad. It will undoubtedly continue to grow and gain influence over the way people manage their money. The success of the Robo industry, in terms of assets under management, is a testament to the desire of millions of investors to willingly give up control. I have no argument with this decision. It makes sense for them. But Robos are not for everyone.
Here's the problem. When you sign up with a Robo, you have two choices: either tell them what you want your asset allocation to be, or choose one of their pre-designed models. If you know enough to set up your own asset allocation, then why do you need a Robo in the first place?
If you allow the Robo to pick an asset allocation model for you, you'll probably get a cookie-cutter portfolio based on the questionnaire you filled out, and it will be heavily influenced by your age. Is that really what you want?
Most Robos use a standard 60-40 or 70-30 stock/bond model, depending on your age when you sign up. They don't pick stocks for you, and you will never get a phone call or an email alert from them that warns you about trouble ahead and asks whether you want to play a little defense.
The Bottom Line
The decision to turn your account over to a Robo or use a traditional advisor isn't a binary one. There are other choices available out there.
Certified Financial Planners. These are professionals who have gone through a rigorous training and testing process to achieve the CFP designation. My only caveat is that a CFP has wide training, but not very deep training.
A few years ago I hired 5 college interns to make "secret shopper" calls to CFP firms, armed with a script that laid out all the information a CFP would need in order to come up with a proposal for an investment plan. The results were alarming.
They ranged from 100% equity to just 50% equity exposure, based on identical data and life circumstances. There is no doubt in my mind that there are highly skilled and highly qualified CFP's out there, but here's the question: How can one possibly tell the difference between skilled and unskilled planners?
Investing Coach. An investing coach charges an hourly or fixed fee based on your life circumstances and financial resources. One of the key benefits of working with a coach is that they have no incentive to "capture" your assets, or sell you any products, or lead you down a path that's good for them but maybe not ideal for you.
An investing coach is like a life coach, but they focus exclusively on your money, and look for the best ways for you to meet your investment goals in the shortest amount of time.
Don't know what your investment goals are yet? A skilled coach will be able to walk you through the process of identifying and prioritizing your goals. A skilled coach will work with you for as long as required, but no longer. Once you get comfortable with your goals, and have a written plan for how to get there, you no longer need your coach. I've often said that the best indicator that I've done my job as a coach is the day my client fires me.
These clients often remain lifelong friends, and that is why I do this.