Rich Girl Roundup: Are Roboadvisor Fees Worth It?

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Rich Girl Sierra S. asks, "Is it worth paying a roboadvisor fee to get the benefits they offer, especially if you don't want to put the effort in?" Katie and Henah share a refresher on what roboadvisors are, what fees are worth it, and the benefits of using them.

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Transcript

Transcript

Katie:
Welcome back, Rich Humans to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I'm your host Katie Gatti Tassin, and every Monday we get the opportunity to dig into an interesting money question a little more casually than our full episodes from our audience. Here's a quick message from our sponsors.

Alright, before we get into it, this week's main episode was actually also inspired by Rich Girl Nation based on a lot of questions that we've gotten seemingly recently. I'm not sure why we're getting this one so often, but the question was do I need a financial advisor and if so, what should I look for and when should I start seeking one out? So we decided we'd do a little deep dive on that topic and blow it out a little bit more. So in the meantime, onto the roundup Henah, what is this week's question?

Henah:

This week's question is pretty aligned with this week's episode. It came from Rich Girl Sierra S and it is, is it worth paying a roboadvisor fee, like a 0.25% annual fee to get the benefits of the tax optimization that they offer? Especially if you don't want to put the effort in and aren't super aware of how it works. I think to back up a step, maybe let's explain what advisor fees are. We get into more of this in the episode, but Katie, what are roboadvisors?

Katie:

So a roboadvisor is basically the benefit that we have living in the FinTech future, which is basically that roboadvisors are a great option for people that maybe are not working with a professional but still want to have a professionally diversified portfolio. So typically they are going to be using portfolios that rely on the principles of something called modern portfolio theory.

Henah:

Sexy.

Katie:

You don't have to know anything in order to have what I would consider a pretty expertly allocated pie we'll say. So I think that there are good investment for certain types of investors, but whether or not their fees are worth it probably depends on your unique situation and goals. So if you are a beginner or you otherwise lack the confidence and experience to be managing your own money, this really just requires minimal knowledge and an algorithm is going to select investments for you based on how you answer questions about your age and your needs and your risk tolerance, and then it's going to automatically build and maintain that portfolio for you, which I would say is the cornerstone of smart investing, which is buy and hold and let the diversification do its thing, trust the process.

Henah:

So I feel like we don't have flying cars yet, but this feels like a 2023 gift from God that we have this at our fingertips now. So I've been using the roboadvisors via Betterment for the last year or so since I started working here and you were like, go invest and you use M1 Finance I believe as well. So for me it's been a really good experience, but to be honest, sorry, I haven't done much of a deep dive on the fees themselves that I'm paying for. So how does that work?

Katie:

So in many cases what you're paying is what's known as an AUM fee and assets under management fee. So they're charging you a percentage of the assets that they're managing for you. So compared to human advisors, roboadvisors often offer their services at a lower cost. So the percentage that they're taking will be smaller. Typically it is going to be around 25 basis points or 0.25% set another way, whereas a human advisor is probably going to charge something closer to a full percent or a hundred basis points, put another way. So some even have a flat fee structure, like they'll charge you $10 a month or $20 a month or whatever. But if you were like, okay, how does that really shake out? Depending on how much I have invested, if you had $10,000 invested and you were being charged 0.25% per year, they're taking $25 per year of that 10K.

 And then as the balance grows, obviously you're going to be paying larger fees. And so for some people, if you're talking about a full percentage point that's really eating into your returns. What most people I think about with the roboadvisor is are the benefits that I'm getting from this, like the diversification, the tax loss harvesting, which is basically just some smart tax moves. If you've got a big taxable account, the proper maintenance of my asset allocation, things of that nature, is all of that worth 0.25% per year To me? For some the answer is yes. For others the answer is no. But that's generally the kind of think the value trade off there.

Henah:

So when you open your account and you see that, I don't know, $3 has been taken per month from your account, that is all collectively going towards that 0.25% or to put it in other words, that annual fee is being spread out month to month over the year?

Katie:

Yeah, it's either monthly or quarterly. I would have to check, to be honest, to know what the fee structure, they might have different fee structures, but my guess is that it's either monthly or quarterly that those AUM fees are being charged.

Henah:

But I just wanted to clarify that the AUM fee is an annual fee. It's not something that's being charged per month as your balance grows,

Katie:

It's not 0.25% of the balance per month? No, it would be spread out. It is an annual fee, yes, that is the accurate way to put it.

Henah:

Okay. So what if you have different accounts like I do with Betterment? So for example, I have a taxable brokerage account and then I also have a childcare taxable brokerage account, which is specifically for something I might use in the future. I have different goals associated. So how does the roboadvisor help figure all of that out?

Katie:

In my mind, they really shine when you have an overall asset allocation that you're trying to maintain and they can allocate your holdings in a tax advantaged way. So think like asset location versus allocation where you might say I want 90% stocks and 10% bonds spread out across all of these accounts. And so maybe they'll put the bonds or the things that have high yield into the tax advantaged, tax sheltered accounts, so you're not paying a bunch of capital gains or dividend taxes on those things. I think that's kind of where they shine because they can allocate or they can locate your assets in a strategic way across the various accounts. But I think that that probably depends on what you've told it those accounts are for. And if they're on wildly different timelines, then maybe not so much because they're going to be adjusting the allocation in each account based on when you're telling it you need that money. But theoretically, I think if you had multiple accounts for the long-term, it can kind of tax efficiently invest on your behalf.

Henah:

Okay. And then how do you know if it's worth it or when does it start feeling not worth?

Katie:

Probably depends on the context of how much you personally value convenience and whether or not you feel like being hands-off is of value to you. Now, I think where that can get tricky is that there are some financial planners, I would say some humans that are charging you 1% that will say, oh, well it's really hands off and you don't have to do anything. And you could be like, oh yeah, well I value convenience. Sure. But I think a lot of people don't understand just how much they're paying for that convenience. So for example, I talked to an individual the other day who has an advisor with a big firm that charges her 1.35% per year on a brokerage account that has a million dollars in it.

Henah:

Oh my gosh.

Katie:

And she was like, well, I really like the guy and he helps me with tax loss harvesting, which is great.

Henah:

I bet he does… for 1.35.

Katie:

And I was like, just to put that in perspective, you're paying this guy about a thousand dollars a month, you're paying a thousand dollars retainer for his services. Is that worth it to you? Do you feel like you're getting a thousand dollars worth of value? Now for some people that have really complicated estates and who have a lot of assets and their business owners and they have equity and they're doing trusts, and there are some people for whom full service financial planning, they might be like, yes, actually the 1% I am getting that much value because my estate is so complicated in this event and she's me a little bit more about what this person is doing from her. And I was like, I'm going to be really honest, the things that you're describing a roboadvisor can do for you for a fifth of the price.

And so I think that there is a certain misconception that you're always going to get more value if you're paying more for these things or if you're paying a human being a percentage point that you're going to get that much value for your money. And unfortunately, just like any other profession, it is possible to way overpay for the value you're being provided. So I think it's pretty situation dependent, but if your investments are relatively straightforward and you're doing the buy and hold strategy and you are comfortable with not touching it when the market goes down and you don't have a history of going in and removing, selling everything off and what have you, I think that this is a pretty good middle ground solution for the average person and for most people and for most beginners, I know very few individuals I think who have enough money and complexity to where I'd be like, yeah, you should probably have a CFP professionally managing all of this for you.

Henah:

Well, I think one of the things when you're starting off especially is you hear of Fidelity and Vanguard, whatever, and then you log on and it's just so overwhelming. So I think sometimes you get turned off by that and you'll be like, well, I'll just pay someone else to do it because it's just easier that way. But I think one of the beautiful things about the roboadvisor options that we've talked about today, and to be clear, we've had M1 Finance and Betterment as sponsors before, but we are organically mentioning them here. They make it easy to understand and easy to see and easy to just set it and leave it alone. So I think that's another turning point for people to realize. It doesn't have to be complicated. It doesn't have to look overwhelming the way that the backend might.

Katie:

I think Vanguard has made a lot of strides, but I too have logged into a Vanguard account and been like, okay, I kind of am afraid to click on things because it's like a little bit, you're kind of like, I'm not really sure if that's the right button to press for what I'm trying to do. And so it's confusing

Henah:

That I'll be like, well, yeah, I'll pay someone 1% to do it.

Katie:

Right. And to your point about the sponsors, yes, both of those brands have sponsored our content before, and the reason they've been sponsors is because we liked them so much that we were like, Hey, we want to work with you and align ourselves with you. So definitely want to make sure that we're maintaining that kind of editorial integrity line of anything that we're talking about in this context of a Rich Girl Roundup is things that we like. That is a genuine recommendation. Even if that person has been a sponsor in the past, just in case anyone wants other options, there are products like Wealthfront, which is a Betterment competitor that does the same thing really and has the same fees. So that's another one to look at if you're trying to really assess the landscape. I know Ellevest is another option. They are. We've had their founder on the show before, Sally Krawcheck.

They are focused on women primarily, and I think they've actually moved away from the AUM model and now they charge a monthly subscription fee, but it's worth looking at all of them. I think we personally kind of chose Betterment as the one that we liked the most. And I think that philosophically the reason behind that was because they have a bit of a value tilt to their investing, which is something that aligns to my personal investing philosophy. And so I really liked that they kind of bake that into the products, but you could theoretically turn that off. You could go in and customize things so that you are not investing in a value tilt way, but value investing for good value companies or undervalued companies. It's almost like the Warren Buffet approach, if you will. If looked into value investing, you could learn more about that, but historically, Betterment had that tilt in their portfolios, which I really liked from a roboadvisor. And Wealthfront does direct indexing, which is very cool. So that's something that they do that I don't think the others do. So that means they will build an index fund by investing in the individual stocks themselves versus buying one fund, which gives them more tax loss harvesting flexibility. So if you have a lot of money in taxable accounts, specifically Wealthfront’s direct indexing is a cool feature to consider. I'm

Henah:

Not going to pretend like I got any of that, but what I did for my philosophy is that if Katie recommended it, I'll just do it. And that's where we're at.

Katie:

Hey, I love the implicit trust, but I think generally the best practices for investing kind of go for no matter what you're using, which is forget about trying to time the market. You're not going to time the market. No one can time the market. So trying to wait for the dip and buy the dip, not worth your time. Just as soon as you have the money to invest, go ahead and invest it and invest it in a way that aligns with your broader philosophy, your strategy, buy and hold. Don't be trying to hop in and out or trying to say, Ooh, things are bad right now. I'm going to pull out and wait again. That's kind of market timing and you're probably going to get burned by doing so. And yeah, low cost diversified index funds or index ETFs, that's also going to ensure that you're not going to have sometimes mutual funds when you buy mutual funds. There's a lot of movement within them that can create taxable events in brokerage accounts. I know my dad, for example, got burned with that in the past. They had a money manager that was doing a lot of active management and mutual funds. So Index ETFs a good bet. It's basically try to go for simplicity and choose simplicity wherever you can,

Henah:

Or a roboadvisor will just tell you where to go, and then you just do it that way.

Katie:

And I know we've talked about M1 Finance before, but I guess to put a finer point on that, they don't tell you what to buy, but they basically give you customized options. So you can go into their research section of their site and click portfolio pies and then select into like, oh, I want general investing pies to pick from that range, from very conservative to very aggressive. And then you can see the underlying holdings and apply that pie to your portfolio. So it will invest every incremental dollar amongst that allocation for you. You can look at expert pies that are built by specific investors that you can align yourself with someone else's philosophy, but it's kind of one step below the robo from the standpoint of being hands off. You have to make a couple more decisions.

Henah:

I'm waiting for the Money with Katie Pie.

Katie:

Same, actually, we got to make a money. I don't even know how to make a pie. We should look into that. That'd be really fun. Yeah, I think that obviously there's also always going to be the Vanguard or Fidelity approach where you can just go directly to the source, but it totally depends on your confidence level. And the reason that I love roboadvisors for people is because so often I think a lack of confidence or knowledge prevents people from investing. And in today's day and age, when there are products like roboadvisors around, it circumvents that journey. It cuts off the like, well, I got to learn a ton of stuff first before I can invest wisely. And because they allow you to invest wisely pretty immediately, it's amazing. Well,

Henah:

I think that that's a helpful foundation for us to look forward to Wednesday's episode with.

Katie:

Yes. Alright, that is all for this week's Rich Girl Roundup, and we will see you on Wednesday to talk about all things financial advising.