- Robo-advisors simplify the investing process.
- I used to invest with robo-advisors so I didn't have to select investments personally.
- I got tired of paying the fees they charged and now I select my own ETFs.
Robo-advisors came at a cost I just couldn't justify.
Robo-advisors are services that invest your money for you based on an algorithm. For a small fee, you can provide insight into your risk tolerance and the robo-advisory service will put your money into a mix of different funds appropriate for your goals and investing timelines.
I do not enjoy spending time researching potential investments, so several years ago I decided to try out a robo-advisor. I opened an account and put a substantial amount of money into it. But, even though my investments did OK, I ultimately decided this method of buying assets wasn't for me. I pulled my money out and haven't invested with robo-advisors for years. Here's why.
This big downside of robo-advisors prompted me to switch to a discount brokerage firm
The biggest reason why I decided that I didn't want to invest with a robo-advisor anymore is because I did not want to pay the fees that I was being charged.
See, robo-advisors are much less expensive than working with a traditional financial advisor to develop a customized portfolio for you. But you still pay a fee for this service. I was paying 0.25% each year. And while this doesn't sound like a huge amount, the fact of the matter is that this is on top of other investment expenses. My robo-advisor invested my funds in a mix of ETFs, each of which also charged small fees of their own.
When you start racking up fees to pay for investments, you eat into your potential returns. And because I am investing over a long time horizon, paying these fees year after year has an outsized impact. Each year, the fees leave me with a little less cash to re-invest, which means that I don't benefit from the power of compounding as much as I would if I was able to keep more of my money.
Now, if my robo-advisor had done an amazing job and been great at picking investments for me that outperformed the market, I would have been happy to pay the cost. But that's not what was happening, nor is it what robo-advisors are designed to do. They simply spread my money into a mix of different ETFs, which is something I could do myself in a matter of just a few minutes without much investment knowledge -- and with no unnecessary added charges.
Should you invest with a robo-advisor or follow my lead?
If you do not want to put any effort into managing your portfolio at all and are willing to give up some of your potential returns in order to avoid spending even a few minutes managing your portfolio, then it may make sense for you to invest with robo-advisors.
But if you are able to put in minimal effort to pick a few ETFs, you may want to consider simply investing using a discount brokerage firm instead. You can use the screeners that your brokerage firm offers to find low-fee exchange-traded funds that give you exposure to different kinds of stocks, as well as to bonds and real estate.
If you do this, it will take you only a few minutes a year to get a good mix of investments that's appropriate to your risk tolerance. Plus, investing like this doesn't come with added fees that eat into the returns you have the potential to earn.
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