Why I Ditched My Robo-Advisor for a Discount Broker
KEY POINTS
- Robo-advisors simplify the investing process.
- They invest your money for you so you don't need to actively manage your portfolio.
- They charge fees and their services aren't always worth it.
There's a big reason why I think my returns will be better.
A few years ago when robo-advisors first became popular, I decided to try them out and put some of my investments into an account with a popular provider.
Robo-advisors ask you a series of questions and then use the answers that you provide to distribute your money across a mix of investments that are appropriate given your level of risk tolerance and investing goals. The robo-advisor I used specifically invested my money in a mix of different kinds of exchange-traded funds (ETFs).
While my account with my robo-advisor performed decently, I switched my money back out of it less than a year later and moved it back to a discount brokerage firm. Here's why I made that choice.
I was tired of paying a robo-advisor fee
There was one simple reason why I opted to switch from a robo-advisor back to a discount brokerage firm: Robo-advisors charge a fee for managing your money.
Now, it is undeniably true that the fees robo-advisors charge are fairly low. Compared to actively managed investment accounts overseen by financial professionals, the fees are negligible. In fact, I was paying around 0.25% for my robo-advising service.
But, this was on top of any expenses charged by the ETFs that my money was invested in. And it was an added investing cost, which only served to eat into my returns.
Since I was investing quite a bit of money and intended to leave it in the market for the long term, even this small fee would add up to thousands of dollars in lost potential returns over time. And I decided I wasn't willing to pay the robo-advisor these fees and cut into my returns when I could invest easily with a brokerage firm myself.
I can skip the fees by doing the same work on my own
The reality is, all the robo-advisor was doing was using an algorithm to determine my risk tolerance and the right mix of ETFs to invest in, then rebalancing my portfolio for me periodically. This was something I could do myself with more precision, limited investment knowledge, and a very limited amount of time.
By simply considering what percentage of my portfolio I wanted invested in stocks versus other assets, I could research ETFs that gave me the right level of exposure to risk and buy them within minutes -- without having to incur fees for a robo-advising service to do it for me.
Now, if you don't want to spend a few minutes considering the level of risk appropriate for you and finding low-fee ETFs that put your money into stocks, bonds, real estate, or other assets, you may be willing to accept the small reduction in returns that come from paying robo-advisor fees. And if you aren't willing to reassess your asset allocation each year to make sure you adjust for changing risk tolerance as you get closer to drawing from your investments, a robo-advisor could be a good option for you so you don't take on more or less risk than you should.
But, for those people -- like me -- who are willing to devote just a tiny bit of time to managing their own portfolio, opting out of paying added fees could leave them with much more money in the end.
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