Considering Roboadvisors: The Pros and Cons
Last week, I mentioned that I had finally taken the next step in my investing journey by opening my first real brokerage account. Incidentally, before arriving at that decision, I explored a few other options — namely roboadvisors. See, I had definitely heard of this technology for some time, although it wasn’t until a recent Dyer News article that I really took the time to learn what they were all about.
So although I ended up going a different direction for the time being, I thought it was worth reviewing what it was that attracted me to roboadvisor platforms (along with at least one minor drawback):
Rebalancing, tax loss harvesting, and other automation
As someone who’s definitely interested in learning about investing but is mostly intimidated by the idea of actually managing a portfolio, the biggest reason I’d consider a roboadvisor is for the automation. Although I could probably wrap my head around something like account rebalancing, I still don’t think I 100% understand tax loss harvesting just reading about it — let alone trying to utilize the strategy for myself. That’s why I’d be more than happy to let algorithms and AI handle those aspects for me and I highly doubt that I’m alone in that.
Before I decided to just open my Vanguard account, one of the reasons I was strongly considering a roboadvisor was because of the low minimum initial deposits that most platforms have. Ironically, had I stuck with my plan to go this route, I wouldn’t be stuck in the investment limbo I find myself in now — but I digress. Looking at some of the most popular roboadvisor options, it seems that the highest minimum for the basic tier is just $500 (excluding Charles Schwab Intelligent Portfolios, which has a minimum 10 times that). Because of that, it’s easy to see why these platforms have become increasingly popular among newbies like myself.
Often times when you read about roboadvisors, there’s talk about how low their fees are. Well, that’s true when you compare them to traditional actively managed funds that not only charge higher fees but also tend to only be open to those with much more money to invest. However, if you’re comparing roboadvisors to certain index funds, then they suddenly look expensive.
On top of that, something that’s not always obvious to those considering roboadvisors is that, in addition to the management/advisory fees, they’ll also need to pay attention to the expense ratios of their portolio. For example, while a platform may charge a .25% advisory fee, the ETFs in one’s portfolio may have an average expense ratio of .15% — bringing the total fees the investor is paying to .4%. Granted, most roboadvisors do say they strive to keep expense ratios low and, even at .4%, these fees are still relatively reasonable. At the same time, those who want to take a DIY approach can probably save some money in doing so.
Ultimately, while I did skip over a roboadivor account this time around, I haven’t ruled them out entirely. A friend of mine recently opened a Roth IRA with Wealthfront, so I’m definitely interested to hear about her experience and perhaps open another retirement account of my own. Eventually, once I get my Vanguard account rolling, it might also be nice to diversify a bit by opening a roboadvisor taxable account as well — who knows?! If nothing else, it’s clear that roboadvisors will continue to be a hot topic, especially as their popularity and capabilities increase.