Robo-advisor services are sold to investors looking for an easier way to invest. There are added costs, but even worse, Robos do not involve the investor very much. They even use that aspect as a selling point. They program the decision-making process. Investors should not be shortchanged in the processes of studying, considering, understanding, and then deciding each portfolio investment. Individual learning and individual decision-making are essential aspects to building investor confidence and commitment. Without it, how much commitment is there to stick to a Robo plan over the long haul, and at what real cost when markets go off the rails?
Two kids. Two different families. One kid is told he will be getting a brand new bike for a birthday present, ready to ride. All he has to do is pick 3-speed, 5-speed, or 10-speed. The other kid has to mow lawns to earn enough to buy his own bike, which he assembles himself. Guess which bike will be better taken care of? This is one of the reasons I started The No-Robo Investor. Basic knowledge of index investments is not difficult or complicated, but an investor needs to go through a process of individual learning. Investors should decide for themselves each individual investment in their portfolio, and based on their needs, not a formulaic or systemic decision-making process.
In fact, there is no easy way around the individual process of investing. There is no getting around the fact that, when your hard-earned money is “put to work,” you are putting it at risk, even if you do it by choosing a Robo. No one is going to take better care of your money than you, and it is ultimately your responsibility anyway. So, you should be motivated to invest the time and effort to learn investing basics. An advisor is not going to do that for you. You have to do it.
The good news is that index investing is actually quite simple, and for most people, knowledge of the basics is enough to make your own investment decisions. Having 10 or more Robo-sliced investments instead of 3 or 4 broad-based index funds is not really going to improve your results much, if at all. And then, there is the troubling aspect of handing over your financial life to an advisor for a financial future you alone will face.
The most common argument I hear for getting an advisor is to have someone to talk to when the markets get rough, or to help with tax issues. Well, if you need to talk to someone, why not just call a friend, or better yet, go on over to the forums at Bogleheads.org? How many Robos have a human to help you? While some have limited support, don’t count on a lot of hand-holding. If you need tax help, why not go to an accountant or a tax specialist? Why would either situation require you to seek professional money management, Robo or human? The mechanical process of buying mutual fund shares is already free when you select broad index funds, and that includes technical help with processing the trades. It is hard for me to understand how an index fund investor, especially a 3 or 4 fund indexer, can justify needing professional money management.
I have no stake in the game. I am not an advisor, and I don’t make any income by recommending any financial service, product, or investment. So when you hear from those who disagree with this view, just ask them if they have “skin in the game.” If they ask why, just give them this quote:
It is difficult to get a man to understand something, when his salary depends on his not understanding it.
― Upton Sinclair,
When markets get rough and you are losing sleep, consider that you might be nervous…because you did not select the right allocation between stocks and bonds in the first place. It is not because you failed to pay for an advisor to provide you expert advice about the future or otherwise “get you out in time,” and it is not because you went with 4 funds yourself instead of the Robo choosing 10 funds for you.
If you haven’t already, now is a good time to look critically at your ability to handle risk. Carefully consider your exposure to stocks, especially if you have never been through a real bear market like in 2008-09, or the 2000 dotcom bust. If you are old (like me), you might even remember living through the fun experience of October 19, 1987! If you lived through those bears, what did you do? Did you sell after the market fell, do nothing, or even increase your stock exposure after the market fell? The time to figure out your real risk tolerance is not after the market has already fallen 20%.
If you must use an advisor, don’t use a Robo. Go to a Certified Financial Planner (CFP) or Certified Financial Advisor (CFA) who puts in writing they have no conflicts of interest, and that they adhere to a fiduciary standard. Do a background check using the Broker Search tool at FINRA. Do not agree to pay unless it is based on a flat fee, not one based on a percentage of your portfolio’s value. Insist they recommend only the lowest expense ratios and broadest-based mutual funds. ETFs should only be the most liquid-traded and the lowest expense ratios. Both you and advisor should focus on determining and understanding clearly how much risk is appropriate for you, and what types of investments are appropriate for you. Getting that part right is the best use of your time, whether you use an advisor or not.
I agree some people may need professional financial help. You might have a trust, rental properties, a business, or you may have complex tax issues. I am not talking about you. For the rest, if you need help at all, you don’t need to hand over your financial assets to a Robo or other advisor for permanent babysitting. Yes you need to have a plan. You might even decide to pay to help you build it. But, if it is actually a good one, then you should not need ongoing asset management services to implement it or to manage it. Otherwise, it is just not a good plan.
While investing is simple, it is not always easy to stay the course. You do need to spend at least some time, even if it’s just an hour or two per month, learning in general about investing. The Bogleheads wiki is a great place to start. If you do that, you can attain genuine confidence, and make investment choices you can stand by through thick and thin. If you have your portfolio in place and need support, go on over to Bogleheads.org, the friendliest financial community on the Internet. It is a non-profit site, and it’s filled with private investors like me who give their time generously and freely every day to help investors do it all by themselves.