I am a huge believer in do-it yourself investing. I believe that any one can learn to manage their own investments effectively given the time and the inclination. And it has never been easier or cheaper to manage your own investments. But there are many investors who do not have the time, nor the inclination to take on this task on their own. Or for whom the learning curve is too steep too quick. Or, maybe more importantly, need help managing their emotions during trying times. This post is for them. Technology and competition is making it easier and cheaper to get investment help.
Have you ever heard of a robo-advisor? This is the hot thing in the portfolio management world right now. Basically, a computer/robot does the grunt work of investment selection for you. After all, managing a buy and hold portfolio of diversified ETFs is an easy thing to do for computers. The two biggest companies in this space are Betterment and WealthFront . You create an account, answer a series of question to determine your investment personality, then are recommended an allocation with a portfolio of ETFs. And, of course, you don’t pay too much for this. Below is a comparison from a recent post on Mebane Faber’s site.
As the table shows the new robo advisors are really shaking up the landscape. Also, investors pay way too much money to have buy and hold portfolios managed for them. The industry average fee for managed portfolios is 1.32%, according to Vanguard. For buy and hold. On top of the underlying ETF fees. Seriously! Fidelity seems particularly egregious. Buy and hold should be cheap. If you have a great investment advisor who is doing advanced things like tax harvesting, active investing, risk management, etc, great they should be payed more for this added value but not anything more than 0.5% to 1.0% in my opinion. Anything above this and I would go somewhere else.
But there is more value in personal financial advice than just the mechanics of investing. To me the biggest value in financial advice is helping to manage an investor’s emotions. That is most investor’s biggest failing. Its why investors under perform even the mediocre returns of mutual funds. I all has to do with our behavioral biases . And here is where a good advisor can really pay off. This image depicts the value of a financial advisor better than any words I can write.
**Image by Carl Richards, Buck’s Blog at the NYT. Check out the blog for more simple yet powerful investment messages.
And you know what? A lot of that great investment advice coming from a great advisor will be ‘I recommend we do nothing and stick to our plan’. Yeah, do nothing is often the best investment advice you will receive. So, there is a ton of value in financial advice you just shouldn’t pay a lot for it. Vanguard has really taken the lead here with their 0.3% annual fee. Combined with their industry leading low costs ETFs it makes for a powerful combination. If anything you should use them as a benchmark to the advice you are getting today.
In short, there can be a great deal of value in financial advice. And many investors need it. There is just no reason to pay lot for it.