You may have heard the advertisements for online advisors, also known as investing apps or robo-advisors. These automated investment platforms such as Acorns, Betterment, and Wealthfront bring something very unique to the market not seen before; the ability to automate your investment management for pennies.
Clearly, as a wealth management and financial planning firm, we are hardly an objective source. However, we hope to show you in this short article why the old adage “you get what you pay for” might be a good fit here.
To begin, it is important to understand how investment management fees work.
What’s in an investment management fee?
Paying for investment management is not a new concept. When you invest with an automated platform, you are paying a fee of around 25 basis points — give or take. This is 0.25% annually. So, if you invest $1,000, you are paying $2.50 a year in fees. This is the fee for managing your assets and rebalancing your portfolio based on factors such as your investing time horizon, risk tolerance levels, and savings goals.
With a financial advisor, you are also paying a fee to for them to manage your assets, but the fee can vary significantly based on what types of services the advisor is offering to you. In addition to investment management, many financial advisors also offer financial coaching, cash flow planning, tax management and planning, retirement income planning, estate planning, education planning, among many other things. A good financial advisor is your advocate and financial coach, someone who is accessible and able to provide guidance to help you through all of the many complex areas of financial management.
Investment management is just a small piece of what a good financial advisor actually does.
Let’s talk about value.
With any purchase, it is silly to consider the price without also weighing the value. $10 is far too much to spend on a hamburger at McDonalds, but is reasonable at your local burger joint where they grill it up fresh with high quality meat. Why? Because...value!
The point of purchasing anything is because it will provide some sort of value to you. If a consumer is presented with two options with the same prices, but one has more value to them, they would be foolish not to choose the one of higher value.
Too often, investors become so focused on the fees an advisor charges that they lose sight of the value being provided to them.
A recent study by Vanguard suggests that a financial advisor is worth about 3% per year.
In other words, if an investor is paying 1% per year in fees, they are netting about 2% more than they would have if they had invested on their own. This 3% comes not just from the advisor making good investment allocations and product choices, it also comes from the advisor talking sense into their clients when their clients are tempted to make bad financial decisions.
In fact, the study shows “behavioral coaching” to be worth 150 basis points, or 1.5% annually and “spending strategy” to be worth 0-110 basis points. These are the things which cannot be accomplished through an automated investing platform. In other words, according to this study, not automating the process is worth between 1.5% and 2.6%.
This study doesn’t even fully account for the value that financial planning provides to investors.
That said, when it comes to hiring a financial advisor, it can be tough to place a quantifiable value on something that can be so subjective. If one has no prior investment experience, the value they will receive from a professional walking them through their options is obviously higher than someone with a graduate degree in finance. The price is the same for both, but the value is higher for the first individual.
When it comes to your finances, try to consider possible future situations you could find yourself in, and ask yourself if you would rather have a professional or an automated platform to assist you in your decision making.
- Does it make more financial sense to lease a car or purchase?
- You just received an inheritance, how do you properly invest it in a way that will be in your best interest?
- Your loved one passes away. How do you navigate the murky waters of probate, estate taxes financial planning and tax strategy?
- Should you fund your child’s education? If so, how do you do this in a tax-efficient manner and how much should you set aside?
- How do you determine when begin withdrawing social security?
- How much you should be setting aside for retirement?
- How do you ensure you will not outlive your assets?
These are just a few of the questions that a financial advisor can answer for you that an automated service cannot.
You see, robo-advisors do one thing — manage your investments for a low cost. What they don’t do is help you through the many challenges and critical junctions of your life, guiding you to make the best financial decisions. They are not a phone call away -- ready to serve you and answer your questions. When the market takes a downturn, they are not there to calm your fears and help you make wise decisions. A good financial advisor really proves his or her value through a personalized approach that incorporates good planning, behavioral coaching and accessibility. A good financial advisor provides investment management, but adds so much more. At the end of the day, the value of human advisor cannot be replaced by automation.