Ask a Fool: Should I Use a Robo-Advisor or Just Invest in Index Funds?

A robo-advisor adds to your investment expenses, but it also adds value.

Matthew Frankel, CFP
Matthew Frankel, CFP
Jul 5, 2019 at 12:00PM
Investment Planning

Q: I'm considering using a robo-advisory service for my investment account, but was wondering if it wouldn't be a better choice to just buy a few index funds instead? Seems like it would save money.

It's true that simply buying index funds would be the cheaper way to go. Generally, robo-advisors invest your money in index funds and charge a management fee on top.

For example, TD Ameritrade's Essential Portfolios robo-advisory platform invests your money in ETFs with expense ratios of 0.07%-0.08%, and then charges a management fee of 0.30% of your assets on top of this. So it's only natural to ask, "Why don't I just buy those ETFs myself instead?"

However, it's important to realize that there are certain things a robo-advisory service does for you. For example, they'll rebalance your portfolio over time and make adjustments to your investment mix as deemed necessary. This is nothing you can't do yourself, but it takes time and knowledge to do it right and it's an absolutely essential part of a smart long-term investment strategy.

You'll also have other features such as tax optimization, which can be tricky for even experienced investors to do on their own. Plus, most robo-advisors give investors access to some sort of live help to answer questions you have.

The point is that buying ETFs can certainly be a smart option for investors who don't mind doing their own portfolio maintenance, but it's important to realize that robo-advisors truly put your investment plan on autopilot and can be worth the extra cost to many people.