Success with investing means not only saving on investment costs and selecting the right allocation, but also having the confidence from knowledge.
One of my biggest concerns about the trend towards robo-investing is that, at its core, the presumption is savers do not want or need to be bothered with knowledge or in-depth understanding about their investments. One online session does it all! Another presumption is that investing is another area requiring professional help, like when you go to a dentist or the doctor. Robo-advisors have been characterized as the “uber-ization” of investing. It is a streamlined process without the added cost or time needed with a human advisor. The metaphor works when comparing use of traditional financial advisors with the lower-cost “self-service” robos. Both of these options miss critical components. Investor knowledge and decision-making. Worse, investors are seen simply as commodities placed into a formulaic system based on pre-ordained selections of investments the robo deems fit for use in their system. At least with a human, there is a chance for learning, but then you have a cost for that.
Schwab’s Intelligent Portfolios “include up to 20 asset classes across stocks, fixed income, real estate and commodities,” and added to that is a cash holding. The presumption is that you are supposed to take as a given that more assets classes equals better diversification and better returns. More sophistication has to mean better returns than a simple three or four mutual fund option, right? 
First, not all asset classes are created equal. Some have higher investment costs than others. Others, like commodities, do not even generate a real return, only a speculative one. Think you can grow an ounce of gold into more ounces? Think again. Keeping with the Schwab example, they include “fundamental weighted” funds costing 3-4 times what a broad index Exchange Traded Fund (ETF) charges. There is no proof that future returns from fundamental indexing will be superior to straight market cap weighted indexes. In summary, robos prefer that you assume a “need to do more” than simply invest in a few efficient, low cost mutual funds, and that their robo solution will provide you better, cheaper, risk-adjusted returns in the future. While for some, it is cheaper than using a human advisor, it is horse squeeze to assume investors cannot do better by themselves.
Then, we have the question of using ETFs versus mutual funds. If the ETF is very liquid and comprehensive, like a frequently-traded, broad index fund (think SPY or BND), there should be little difference. The problem is that robos tend to include more “esoteric” funds, ones that not only trade with a larger spread between bid and ask prices (translation: higher cost to you), but also trade at a discount or premium to the underlying assets in the ETF (translation: higher costs to you if the manager buys at a premium or sells at a discount to asset value).
Like many things in life, we sometimes do not mind paying for convenience, and robos are convenient. But, index mutual funds purchased though a fund family are cheaper, and I would argue just as convenient. You can set up automated investments and withdrawals with all of the major fund family companies (Vanguard, Schwab, Fidelity). If you choose the mutual fund option, you avoid the churning and turnover from frequent rebalancing done by the robos. Numerous studies, like this one, show there is little to no difference in returns based on frequent rebalancing.
Take an interest in some basic investing principles and manage your own investments. It need not be complicated or time-consuming. Want some specifics? Take the time you were planning to spend with a financial advisor, and instead study some investing basics like FINRA Key Investing Concepts and Bogleheads.org’s Getting Started. About two hours should do it, and you will have something much more valuable: confidence and knowledge to make your own investment decisions, which gives you the fortitude to stick with your plan when the going gets tough. Write out an investment policy statement, about two hours. Once every year or so, rebalance, about two hours per year to review your portfolio against your chosen allocation. It’s really not that hard, folks. How much fortitude will you have to stick with a robo-generated portfolio when things get rough?
Selecting 3 or 4 stock and bond index mutual funds is enough to outperform most active managers and robos over the long term, and you will save more money with reduced fund expenses, lower turnover, and no ETF-related costs. A market cap weighted index ETF will cost today about 0.05%, while Schwab’s fundamental index ETFs cost 0.32%-0.48%. We will use for simplicity the average of 0.40%, or a difference of 0.35%. For a $100K all stock portfolio, that is a difference of $350 per year, and that is just the expense costs alone. Add to that bid/ask spread and discounts/premiums specific to ETFs and higher turnover, and you can guess those add up to more than $350 per year. Add to that cash balances which generate zero interest to you.
Invest smartly, confidently, and for less…on your own!
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