It seems like every year, a new investing trend comes along trying to reinvent the wheel.
All the features of the new wheel come with a cost, of course. But the old wheel works fine for most people.
[ad#Google Adsense 336×280-IA]And it was no different last year… 2016 was the year of the robo-advisor.
Robo-advisors are programs run by algorithms that automatically invest your money in funds or stocks based on your goals and tolerance for risk.
(We’ve written about them before here and here.)
One benefit of robo-advisors is that they remove human bias. There’s no sales person trying to put you into an investment for which they receive a commission.
They also remove the chance of human error. Sometimes even advisors with the best intentions get it wrong (of course, so does the algorithm, although that’s not supposed to happen).
The fees are small – typically 0.25% at the low end and up to 0.5% at the high end if you use the robo-advisor’s premium services that allow you to talk to a human for advice. That’s substantially lower than the standard 1% you’d pay an investment advisor.
However, with an investment advisor, you have a relationship with him. He’ll listen to you complain about your daughter-in-law.
The robo-advisor and its human counterparts won’t. They don’t know you, and they don’t really care. The humans are just available (at an additional cost) to help you define your goals and answer questions.
For example, Betterment, the world’s largest robo-advisor, will charge you 0.25% for basic service and 0.4% for one phone call per year with a certified financial planner. Or you can pay 0.5% for unlimited access to a human advisor.
If you have a $200,000 account, it essentially costs you $300 for one phone call a year or $500 for unlimited calls. And the higher your account total, the more it costs you.
Then the investments it puts you into also have fees, though to be fair, they are very small – sometimes less than 0.1%.
But that’s on top of the annual fee that you’ll pay.
Instead, you can have it all: ultralow fees and great advice…
A Hybrid Alternative
Vanguard’s index funds have very low expense ratios – usually 0.15% to 0.35%, and you can get a detailed financial plan from an advisor.
The advisor will create a financial plan based on your personal situation for an annual fee of just 0.3%, which is lower than the robo-advisors’ fees.
And if you call them again and again, your fee stays the same. It’s always 0.3%.
Vanguard is all about keeping fees low for investors and allowing them to keep more of their money. (Editor’s Note: Investment legend Warren Buffett is a fan of Vanguard for just that reason.)
Now, the Vanguard advisor isn’t going to get into things like insurance products with you. They don’t sell them, and neither do robo-advisors.
If you need insurance products – by the way, I believe insurance products are terrible investments – you’ll need to talk to someone who is licensed to sell them.
But a Vanguard advisor can discuss most types of investments with you.
He isn’t going to tell you which hot biotech stock to buy, but he will help you determine the right asset allocation and funds to help you reach your goals.
I also like the fact that, regardless of whether you need to speak to an advisor or not, you’ll pay next to nothing.
You could always start off with a Vanguard advisor if you need help. Then once your plan is set, opt out of the program (to save the 0.3% annually) – and then sign back up at a later date if your circumstances change.
Worst-case scenario, you’ll pay roughly the same as you would with a robo-advisor. Best case, you’ll pay less and have access to all the human help you need.
Keep in mind, you won’t pay just to have some of your questions answered. But if you want personalized advice, that’s where the 0.3% fee comes in.
The Oxford Club doesn’t have any kind of relationship with Vanguard. But we do recommend many of its index funds in our Gone Fishin’ Portfolio.
I also have an account with Vanguard and invest in its index funds.
Robo-advisors are an option if you want a machine to pick your investments. But if you want some help from a human being, you’re better off using Vanguard or a company with similarly rock-bottom fees.
Good investing,
Marc
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Source: Wealthy Retirement