How to decide on a robo-advisor website.
One of the biggest changes to investing over the last two decades hasn’t been the stock market crashes or the historic bull market, it’s been the creation of robo-advisors.
In this video, I’ll show you how these low-cost, automated investing sites can create a stress-free investing strategy to meet your goals. I’ll talk about the pros and the cons and reveal how to decide if robo-investing is right for you.
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A History of Robo-Advisors
We do a lot of stock-picking here on the channel but I know there are a lot of people out there that don’t want the stress or just don’t have the time to manage their own investments.
That’s why I wanted to put this video together to talk about a new type of investing, a completely do-it-for-me approach but at a fraction of the cost you’d pay for similar options.
With the help of Emperor Investments, I’m going to walk you through the pros and cons of robo-advisors, how to decide which might be right for you and talk about a new kind of robo-advisor that’s low-cost and fills some of the gaps in previous advisors.
Emperor Investments is an equity robo-advisor that invests your portfolio in individual stocks rather than funds so you get direct ownership and no fund fees.
In the past, if you wanted to invest but didn’t want the stress of stock-picking, you’d have an advisor manage your money for a 1% fee each year. Now one percent didn’t sound like a big deal until you thought about it. That 1% investing costs you more than $118,000 over 30 years including the money you don’t make on the fees.
So technology started developing a better, low-cost option and robo-advisors were created. Robo-advisors are investing sites that use a computer program to do everything a traditional advisor would do.
They assess your investing goals and tolerance for risk and any other investing needs. The program takes all of this and invests your money in funds, automatically adjusting your portfolio to stay on track.
Pros of Robo-Advisors
I know a lot of you are still hesitant about robo-advisors so let’s go over the pros and cons of the new way to invest and how to know if it’s right for you.
The most obvious benefit is a do-it-for-me approach and the ease of use. It literally takes less than ten minutes to set up an account and answer some basic investing questions. You’ll answer questions like your age, retirement age and expenses.
Then you’ll answer a few questions that will help the platform understand how much stress you feel from big swings in your portfolio. That’s an important part of investing that most DIY investors neglect and a big reason that many investors freak out in a market crash.
Answering these questions, gives the robo-advisor everything it needs to create your portfolio and manage your investments. That’s it. You make regular deposits and the platform automatically invests your money.
Another benefit to the robo-advisors was the lower cost compared to traditional advisors. Robo-platforms still charge an annual fee but it’s lower, so must robos are between a quarter of a percent to half a percent a year.
The problem has been that since robo-advisors invest your money in exchange traded funds, that adds another fee you pay to the fund company. The average fund fee is just over .4% a year.
So total fees to a robo-advisor tend to be around 0.7% to about 0.9% which is still less than a traditional advisor. Emperor Investments is getting around that by investing directly in stocks so you don’t pay those fund fees. It’s a revolutionary new shift for robo-advisors but we’ll talk more about that later.
Probably the biggest benefit to robo-advisors is one that investors don’t even think of, saving themselves from…themselves.
Most investors are horrible at…well, investing. Researcher DALBAR surveys investors every year to find average returns and found that investors have produced an annual return of just under 4% over the last 30 years. That’s less than half the stock market return over the same period. In 2016 alone, investors missed the stock market return by almost five percent.
This was all because of trading fees and bad investing decisions like panic selling, that buying high and selling low.
So robo-advisors take that human error out of the equation and manage your investments based only on your needs.
Cons of Robo-Advisors
That’s not to say that robo-advisors aren’t without their drawbacks. First is that robo-platforms haven’t quite gotten the personalization investors need. Robos invest your money on one singular goal, exclusively your retirement savings. Anyone with kids or bigger dreams than just retirement knows this is a problem.
By investing your money only on retirement goals, your investments are going to be way off to meet any other goals. For example, someone 45 years old needing to pay for their kids education is going to find almost all their money in riskier stock investments.
A stock market crash will wipe out half their portfolio when they should have had that college money in safer investments.
Transparency is also an issue if investors don’t understand the dual-fees structure with robo-advisors. The advisors are pretty upfront about the annual fee but the disclosure about the fund fees isn’t always easy to find so a lot of investors are hit with some surprises when they check their annual statement.
These drawbacks to robo-advisors are why I reached out to Emperor Investments to look into the platform. Emperor offers those benefits of a low-cost do-it-for-me approach but addresses some of the cons.
Is a Robo-Advisor Right for You?
Emperor Investments has special functionality that can invest your money on multiple goals, so your investments can serve both your retirement goals as well as education and other goals. Since the platform invests in individual stocks, you also don’t get the hidden fund fees. You get everything for the flat 0.6% annual fee, almost half the traditional advisor fee.
Emperor has a built-in dividend stock focus that automatically reinvests dividends in your account if you choose. Those in the community know I’m a huge fan of dividend stocks so that was a big plus for me.
Now again, robo-advisors aren’t going to be for everyone so how do you decide if it’s best for you?
The first question you need to ask is whether you want to or have the time to manage your own investments. I think a lot of investors think picking stocks is about turning on the TV for 10 minutes to get a dozen stock recommendations.
That’s not investing, that’s gambling.
Picking stocks is about doing a deep dive into each company, understanding its competitive advantage and valuation. That’s going to take a lot longer than 10 minutes.
Another question to ask is if you have the ability to ignore the media and the market noise to invest for your long-term goals? Are you able to not get caught up in all they hype, not get stressed out, and hold your stocks even when everyone else is freaking out over a crash?
Even if you’re not sure you want to totally switch to a robo-advisor just yet, you might consider a mixed-approach where you put half of your money in a robo that will put you on track to meet those goals but you still get that opportunity to pick stocks with the other half of your money. Check out Emperor Investments and that innovative new system of robo-investing.