In the Battle for Low-Fee Financial Advice, DIY Beats the RobosBy
Robo advisers are undoubtedly responsible for some of the most important changes in the financial industry over the last few years. More transparency, lower fees and at least part of the rise in passive investing can be traced to them.
But now there’s a bigger question. Are robos becoming the more expensive option?
When customers open an account at one of these automated investing firms, they’re put into funds from companies like Charles Schwab Corp. and Vanguard Group and charged a fee of anywhere from 25 to 50 basis points. In return, they get some extra benefits, like tax loss harvesting, which can result in a lower tax bill, and automatic re-balancing at no extra cost.
But there’s a catch, the funds that customers buy through these advisers are all available on free trading platforms such as Robinhood Financial, where there’s no added cost. So, they could simply look at the funds the robo advisers would put you in, and then mimic that on their own. Here’s a sample portfolio at one of the largest robos.
Of course, for a person that simply wants to “set it and forget it,” the 35 basis points or so charged by a robo adviser can be completely worth it. It also might also be worth paying up if the user wants to have access to a financial planner in the future, since lots of robos are launching hybrid platforms where for a slightly higher cost users can speak to a human adviser.
“Asset allocation is a commodity,” Dan Egan, director of behavioral finance and investment at New York-based online investment adviser Betterment, said in a statement. “Customers aren’t paying us for that. Our value is delivered through all of the other things we do such as advice on how much to save and in what accounts, tax optimization (tax loss harvesting, asset location, etc.), retirement planning, access to licensed experts and more.”
But for someone that is young and just wants to get exposure to the market at the lowest possible cost, simply buying the funds on a free platform can make sense.