Robo-advisors are the lazy way of investing. The idea is that we answer a questionnaire and give money to a company that automates investing for us. However, with a little work on our side, I would argue robo-advisors aren’t necessary at all when it comes to saving for retirement.

A good chunk of us know about Betterment, Wealthsimple, Acorns, and Stash. One way or another, they help us save money and invest it for us. For the most part, they follow the Modern Portfolio Theory.

The TL;DR of Modern Portfolio Theory is the idea of maximizing returns by creating a portfolio based on risk tolerance. Anyone can do this in a few hours. But if you are feeling lazy and would like a robo-advisor to build your portfolio, then it will COST you.

0.25% of your assets per year

0.25% is a relatively low number compared to the 1% industry average for financial advisors. We need context, let's do some math.

$6,000 * 0.25% = $15

When you have $6,000 invested with these robo-advisors, they will charge at least $15 each year depending on the value of your investments. ($6,000 is the IRA contribution limit in 2019). Due to the nature of compound interest, this isn’t an insignificant number and can greatly affect your total retirement savings.

Over the course of 40 years, if we invest $6,000 each year, we will pay a total of $37,886.72 in fees to robo-advisors (for those who want to check my math). This is a huge number. Let’s face it, no one likes to pay fees.

What exactly are we paying $37,886.72 for? These robo-advisors offer various services ranging from saving nickels and dimes to planning for vacations and retirement. While these are non-trivial services, we want to focus on the concept of retirement. With that being said, are today’s robo-advisors worth the fees that they are charging?

I would say no.

The main benefit of robo-advisors is their automated investing utilizing the Modern Portfolio Theory.

With a little research, we recognize young professionals do not need to follow the Modern Portfolio Theory closely and can afford to take risk because we are young and investing for the long term.

For the most part, investing for retirement means we need total market index funds. Unsurprisingly, robo-advisors have figured this out already as they invest in total market index funds or ETFs for you.

Generally total market index funds have a yearly fee of 0.04%, which means robo-advisors are making money off of you through 0.21% of unnecessary fees.

Over the course of 40 years, if we invest $6,000 each year while paying an annual 0.04% fee, we will pay a total of $6,318.60. Would you rather pay $37,886.72 or $6,318.60 in fees?

Although robo-advisors automate investing for us, we are smart and more than capable of setting up a retirement account with a brokerage firm. If you don’t believe you can do it, here is a guide with screenshots!

For the purposes of retirement, a robo-advisor will not provide enough services to warrant the additional fees. Fees are one of the areas that can hurt retirement savings the most and with shrinking Social Security benefits, we need to save wherever we can.

If you would like to request a specific topic you want to learn more about, please let me know in the comments section below or email me at alan@tomoonfund.com!


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