What Are Robo-Advisors—And Should I Use Them?

Earlier this summer, I had to wear a bowtie for a wedding. Not a junior prom, clip-on bowtie. We wore the collar-popped, standing in front of a mirror, sweating with anxiety for thirty minutes kind of bowties. None of the groomsmen knew how to tie one, so we did what all millennials do best: We looked it up on YouTube. Within five minutes, there were ten phones propped up against the bathroom mirror playing an instructional video on loop. Because of the internet, I am now empowered by the trivial yet fundamental knowledge of how to tie a bowtie. The internet also offers knowledge that extends into the realm of investing. Robo-advisors are the YouTube instructional videos of personal finance.

Robo-advisors allow individuals to invest their own money using technology to guide them through the process. Robo-advisors also generally serve a market that was previously excluded from financial advising services. Many traditional advisors have account minimums that eliminate younger clients who are just beginning their careers or individuals who have less money to invest. Robo-advisors are able to target this untapped market through their low-cost, technology-based platform, which allows these clients to gain investment advice that will set them up for a comfortable retirement.

However, the robo-advisor trend has caused many practitioners in the financial advisory world a great deal of anxiety because traditional advisors cannot compete on price. They generally charge a fee of 1–3% of assets under management. For example, if you invest $100,000 with a traditional advisor, over the course of the year, they will take $1,000 for their services. On the other hand, a robo-advisor such as Wealthfront or Betterment will charge closer to 0.25%, which results in a fee of only $250.

So what does the extra $750 buy you? In some cases, this additional cost is compensation to your advisor for retirement planning, face-to-face meetings, and other financial advice throughout the year. Access to their experience and expertise can be well worth the charge. Robo-advisors cannot offer this level of personalized service because their low-cost business model prohibits it.

In other cases, higher fees are not justified because financial advisors add little extra value past investment management. If they are compensated based on how much money they manage, why would they spend time on services that do not increase their fee? So instead of spending time with clients to meet their financial goals, they spend time attracting new clients to increase their assets under management.

LeFleur Financial is in the unique position of offering services that complement use of robo-advisors. We encourage our clients to implement low-cost investing options and want to fill in the financial planning piece that may still be underserved. Whether clients simply want help figuring how much to save each month or if they want full integrated financial planning that encompasses everything from insurance to estate planning, we can create a financial plan utilizing robo-advisors or other low-cost investing tools.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.