ROBO ADVISOR PROJECT

Here are a few topics I’m considering when comparing my human financial advisor to my robo-advisors:

Advisory fees

1% is too much.

I started considering going away from my financial advisor when I saw my first advisory fees report.  1% fee isn’t unreasonable when compared to the industry averages, but when I saw the fee total in dollars and cents on year-end paperwork, it was a kick in the nuts.  But hey, at least you can write it off.  Valid justification, but its getting harder to justify 1% when I see so many low-fee options (namely, robo-advisors like Betterment and Wealthfront) introducing themselves to the marketplace.  To make matters worse, I’m finding that even the most ethical and candid financial advisors don’t like to talk about their advisory fees.  I had to ask my financial advisor for a fees report at the end of each year so that I could deduct them from my taxes.  If he’s acting in my best interest, why isn’t he pro-actively doing this?  It would be cool if robo-advisors automatically sent this info at year-end.  We’ll find out together if they do.

Fund selection

My financial advisor, Gordon, had very reasonable explanation for why he wanted to put me into mutual funds with higher fees vs. ETFs with lower fees, and he backed it up with numbers.  All good.  I like numbers.  Also, his credibility on the topic was high in my mind because he offered to invest me in ETFs instead if I wished to do so.  But as that initial sales pitch gets further into the rear-view mirror, I can’t help but wonder if I’m only in those funds because those funds have a relationship with his brokerage.  He argued that these funds were special because they are not accessible to the little guy, and that they are run by fund managers the brokerage knows and trusts.  Hmm.  Ok, but can these super-managers really beat a lower fee ETF by enough of a margin to overcome the management fee difference?

Investment strategy

In 1952, an economist named Harry Markowitz received a Nobel Prize for his essay on Modern Portfolio Theory.  I’ll be writing a later post that explains this topic in layman’s terms but here’s the one-liner:  spread your money across a smart mix of asset classes and re-balance regularly.  This is what Gordon is doing for me.  I hired him because, while I understand the mechanics of MPT, I don’t trust myself to re-balance properly over the long haul.  But, here’s the kicker:  Gordon gets his asset allocation logic from Morningstar (cue sad trombone).  So while yes, he is re-balancing my assets properly, he’s not picking stocks or even the asset class mixture.  Morningstar is doing that for him.  Hard not to conclude that my human advisor is following the exact same strategy (MPT) as robo-advisors, but charging more.

Fiduciary services

This is where Gordon shines and makes me want to stick with him.  He is easy to reach and very knowledgeable.  My only complaint here is that he doesn’t come to me with any recommendations.  Instead, I go to him with questions.  Still valuable, I guess.  Also, even when he has provided good ideas/advice, making changes still usually takes a lot of busywork on my part.  Regardless, is this worth 1%?  Would it be more efficient to have a Fiduciary on retainer for when I have difficult questions and pay by the hour?

Tax-loss harvesting (and other tax considerations)

I’m honestly not sure if Gordon does this as part of his re-balancing activity – I’ll have to ask him about that.  But I know for a fact he considers income tax when I ask him to free up some money.  Recently, when I asked him to free up 50k in order to open my Betterment and Wealthfront accounts to conduct this project, he responded with “you’ll have profits to report – still want to do this?”.

Insurance consultation

Just thinking about the word “insurance” makes me want to stop typing.  But no matter how confusing and expensive it seems, its a necessity.  So it is valuable to have a relationship with an expert.  But again, this service may be more efficiently provided by a fiduciary.

CONCLUSION

Can Gordon complete with what seems to be a more effective model in roboadvisors?  Based on this quick list, the competitive advantage he holds is basically solely with his fiduciary consultation.  Both robo-advisors I’m using – Betterment and Wealthfront – provide avenues for fiduciary consultations (I haven’t used this service yet, but I’ll provide a review on those services as soon as I do).  As far as the other categories presented here, well, you can’t get more emotionless than a computer, and both Betterment and Wealthfront utilize tax loss harvesting strategies.  Robo-advisor fees blow away the fees of traditional advisors, and both Betterment and Wealthfront use low-fee ETFs.  On paper, looks like robo-advisors FTW.  Check my latest results to see real world numbers.

-TS

Thinking of hiring a financial advisor?  Don’t know what to expect?  Here’s one man’s experience.

After years of managing my family’s investments via the big on-line brokerage houses, I decided to turn it over to a financial advisor.  Not because I was worried about my performance vs the market, but because I was convinced a pro could do it better.  I was already following Modern Portfolio Theory principles, which the world will tell you is the best strategy for the large majority of investors (and is the strategy followed by robo-advisors), but wanted to hire a professional.  An excellent financial advisor was recommended to me by a very good and very smart friend.  “He’s exceptional.”, he said.  Good enough for me.  I called him that same day.

Gordon the financial advisor met with me in my home to go over his business.  I noticed I was sold on 2 products in this first meeting that are probably very common with advisors – life insurance and mutual funds.  The life insurance was fine – I new I was under-insured anyway because I had just gotten married.  The mutual funds (and their higher expense ratios) required a little more convincing, but ultimately I agreed.

Since then, my portfolio’s performance has been fine, but the fees leave me questioning the value of the service.

Market goes nuts but fees are within our control, now more than ever.

This is not a project aimed at smearing good financial advisors.