The following is a guest post from Barbara A. Friedberg from Robo-Advisor Pros.
When I mention to my friends that I’m passionate about fintech and robo-advisors, I’m typically met with a blank stare. Next come the follow up questions:
“A robot advisor, what’s that?”
“What the heck is a robo-advisor, I’ve never heard of that?”
So, I begin my story; robo-advisors are a new-ish way to invest your money, get professional money management and free up time to do the stuff you really enjoy.
Now, many folks tune out as the “money and investing” topic comes up. It’s typical to get a “What have you been up to recently?” comment at this point, in a not-so-subtle attempt at changing the subject.
But, not one to quit, I explain that you can grow your wealth – a lot – on autopilot with a robo-advisor. As soon as I mention hundreds of thousands of dollars, I have their attention.
And here are 5 reason that you need a robo-advisor:
1. You need a robo-advisor so that you can retire someday.
Retirement statistics are scary. Rebecca Lake writes in a recent RothIRA.com article that the average retirement savings of working families aged 32 to 61 is just north of $95,000, (Economic Policy Institute data). While 38% have less than $10,000 saved. Forty four percent of Americans aren’t saving for retirement.
You’ll likely live into your 80’s and could last even longer.
With the average Social Security benefit of $1,409.91 per month or roughly $17,000 per year, unless you live off the land, you’ll need to supplement your income.
With a robo-advisor you can open a retirement account, answer a few risk questions, transfer money in every month and have that money managed for free or a low fee by M1 Finance, WiseBanyan, Schwab and others.
Invest $500 per month, earn 7% annually and in roughly 30 years, you have over $610,000. If you earn $75,000 per year, you can certainly spare $6,000 to invest for your future! A robo-advisor can make the process seamless!
2. You need a robo-advisor because you want to have fun on the week-ends.
Most folks spend their week-ends playing with the kids, doing chores and squeezing in some fun. If you’re managing your investments on the week-ends – on top of everything else – then there’s not much time for fun.
After choosing a robo-advisor, setting up the account, selecting your risk level, you’re done! You can be confident that the robo-advisor will craft low fee, diversified investments, in line with your goals and risk level. As long as your bank transfer continues into the robo-advisor, your money is set up to grow for tomorrow.
The low-fee benefit of robo-advisors means that your money won’t be going to a high priced financial advisor, but into the investment markets to grow for your future.
3. You need a robo-advisor because you want to get the best returns for the least amount of work with your investing.
Who do you think earns the best returns in the investment markets over the long-term? Do you think it’s high priced active investment fund managers, who regularly buys and sells stocks and bonds, or the patient passive investor who selects low-fee index funds and sticks with the plan through the market ups and downs?
It’s the passive, index fund investor.
And, guess what, that exact strategy is followed by most robo-advisors. The investing studies are clear – passive investing in index funds leads to greater long term returns than the buying and selling of active fund managers.
In fact, Betterment, Personal Capital and others have some of the finest investment minds on their boards of directors, guiding their index fund investment selections.
4. You need a robo-advisor because your investment advisor charges too much.
The average financial advisor charges roughly 1.0% of assets under management. On top of that fee, there are trading commissions and the fees charged by the underlying investment funds. The Principal Blue Chip A (PBLAX), actively managed large cap mutual fund charges a 1.15% expense ratio. If your financial advisor includes that fund in your investment portfolio then you’re paying 2.15% in expenses as you total the fund and advisory fees.
Now, robo-advisors typically invest in low fee index funds. For instance, a popular S&P 500 exchange traded fund (ETF), the SPDR S&P 500 ETF (SPY) charges a 0.09% management expense ratio. Assume that you invest with WiseBanyan or M1 Finance, who don’t charge management fees, and your investments with the robo-advisor includes the SPY. Your total fee would be 0.09%. That leaves 99.91% of your money to grow for the future.
Of course, there will be other investment funds within your portfolio with varying expense ratios, but with a robo-advisor, those funds typically charge very low fees. And, some robo-advisors, such as Wealthfront and Personal Capital invest in individual stocks, without the underlying fees of ETFs, within their robo-advisor.
5. You need a robo-advisor because there are digital advisors with various styles and features.
Robo-advisors aren’t all alike. There are robo-advisors for every type of investor. If you want to try your hand at beating the market, but don’t want the responsibility of actually buying and selling stocks on a regular basis. There are actively managed robo-advisors.
For example, Personal Capital, Qplum, T.Rowe Price Active Plus Portfolios, Merrill Edge Guided Investing, Building Benjamins and Alpha Architect all combine a computerized robo-advisor with active investment management strategies. And you can expect to pay lower fees for these robo-advisors than you would for a human financial advisor.
If you can’t bear the idea of not having a financial advisor to speak with, there are many robo-advisors that also offer access to human financial advisors. Personal Capital, Betterment, Ellevest, Qplum, Wealthsimple and TD Ameritrade all include credentialed financial advisors to help you with your personalized investment questions.
So, if you want top-notch investments, low fees and a set-it and forget it investment approach, then you need a robo-advisor.