Now, I don’t use a robo-advisor. So, I’m not clear about the services robo-advisors provide for the 0.4% fee, but I wonder if there is a better way. You could save on the fee by going 100% on your own with a self-directed account. You can purchase an all-in-one exchange-traded fund (ETF) with a low MER, assuming you have the investment knowledge. Or you can work with an investment advisor who uses passive investments—this would likely cost you about the same as the difference between the robo fee and your previous advisor’s fee. This could give you the peace of mind that comes with having an expert guide.
How do robo-advisors assess risk?
It sounds like you made the decision to move from an 80/20 equity/bond split to a 60/40 on your own and you didn’t really understand why the robo-advisor put your husband in the 80/20 portfolio.
When your husband set up his robo account, he likely completed a risk tolerance questionnaire, which directed him to an 80/20 split. He did not get there because your robo-advisor was moving money around to take advantage of opportunities. That is not permitted, and in my opinion, that’s a good thing.
Although it may seem logical to switch money around in pursuit of higher returns, and you may think that is what you’re paying your advisor to do, it doesn’t work. Yes, you may get lucky once or twice, but over the long term, market timing has proven unreliable.
Is it worth saving fees with a robo-advisor?
Let’s get back to saving on fees. In Antti Ilmanen’s book Investing Amid Low Expected Returns, the author points out that fee consciousness is a good thing but it can go too far, and investors should think instead about fair fees.
Ilmanen writes that low-fee investing pushes investors toward cash and index funds. And, I would add, it pulls them away from the benefits of financial planning, such as knowing you will be OK and that you will still have money to leave to your children.
Now, I am a big believer in index and passive investing, so I can’t knock that approach, but index funds represent traditional investing, in bonds and equities. For added portfolio diversification, non-traditional alternative investments might also belong in your portfolio.
Times are changing, and so are investments
Like you mentioned in your email, Judy: “With COVID, the war in Ukraine and now inflation taking a bite out of our retirement dollars, we are watching our investments in free fall and have nervously stayed invested.”