Are Robo-advisors a Scam

”A penny saved is a penny earned”

Benjamin Franklin

Basics

As we all know, saving money is important for the future. What robo advisors are meant to do are help you build a future savings in a automated way. It is very hands off so you do not have to constantly think about managing your portfolio.

Robo advisors have only just begun to take off in the past decade and many people like the lower expense ratios that a robo advisor offers over paying entities such as a hedge fund or portfolio manager. As history has shown, most people on Wall Street can not even beat out the large indexes. In fact, randomly throwing darts at a stock list to pick stocks beats out most Wall Street investors. What!? Yeah, you heard that right – might as well get a pet monkey to pick out stocks for you and get a higher return :).

And that is why we then have passive investing and robo advisors entering the market. Modern robo advisors are investing using Modern Portfolio Theory and in a nutshell it basically trying to maximize returns based on the amount of risk you are willing to tolerate.

So, why would you be looking to use a robo-advisor?

Pros

Robo-advisors are great for lazy people and people that want hands off investing. While it can be argued that putting money into an index fund is also hands off, a robo-advisor does all the rebalancing for you. Additionally, if you are someone who has trouble saving, having a robo advisor automatically transfer a set amount of monthly on a periodic basis to be saved can help build your savings.

Cons

Robo advisors may not yield the highest return and if you are a person that really enjoys a hands on approach, having a robo advisor may be a bad idea. Additionally, having a robo advisor is not a free service. For companies such as Betterment and Wealthfront, they both charge a .25% management fee on your portfolio on top of the fees on the index funds that they buy. That fee can add up, so if you are willing to learn how to work on your own portfolio management, you could save that management fee. Additionally, you may see some other robo advisors that advertise a no management fee structure, but make sure to read into the details. Companies such as Schwab which offer the Intelligent Portfolios robo advisor do not charge a management fee, but they do heavily invest in their own indexes and require a minimum 6% cash holding in your portfolio. For the risk adverse person, having cash does not seem like a bad thing, but holding cash does not gain the higher yields that would be seen in bonds and equities.

So what am I doing?

I still really do enjoy robo advisors because it forces me to save and have a portion of my savings that I do not need to think about. I use Wealthfront to take a set weekly amount of money to be invested and while also putting some money into my brokerage account. This hybrid method makes sure that I am always saving some money and I have a mix of assets that I keep a close eye on and others that I do not even think about. Even though there has been research that shows a .25% management fee can really add up over a lifetime, I’m kind of lazy so this is the method that I used.

At the end of the day, the questions is if using a robo advisor is worth the fees for you. If you struggle to save, this can be a great way to start and you do not really need to think about it.