Unfortunately, there’s no right answer for everyone. Some people swear by their financial planner as they sail through the Caribbean on their sailboat. Others who’ve retired early may believe in a DIY menu of low-cost ETFs and keeping expenses low. What’s right for you depends on … you.
Learn more about robo-advisors and the pros and cons of using these services.
Robo-Advisor
Using a robo-advisor is one of the easiest ways to get a diversified portfolio at a low cost (when compared to a financial planner). You simply fill out a questionnaire, send in money regularly, and that’s it. The robo-advisor creates an investment plan based on your preferences using algorithms that rely on leading industry practices. You can set up automatic contributions and your account is regularly rebalanced. This might be best for investors who don’t understand personal finance and investing topics, or don’t really trust themselves to create a portfolio that they believe will reach their goals. Additionally, one of the chief concerns financial professionals have with DIYers is they don’t regularly rebalance their portfolio. Using robo-advisors provides a “set it and forget it” kind of investing that appeals to many people.
Financial Planner
While robo-advisors are great for individual goals (like retirement), financial planners provide a broader range of services. Some of these include estate planning advice, strategies on saving for college, providing a steady income stream at retirement, etc. Your financial planner is someone you can call when the markets drop 20% in an afternoon. And if you want to invest in non-traditional assets (like commodities or cryptocurrency) or trade options in a margin account, they can help you learn the ins and outs.
However, gaining access to this wealth of knowledge costs more than the 0.25% to 0.50% you’d pay for a robo-advisor. Most financial planners charge at least 1%, although you can have one-off meetings for a set dollar amount to discuss a specific situation. If you have a complicated financial life or own a business, a financial planner might be the way to go.
DIY
If you want to invest successfully on your own, you first must understand personal finance. Topics such as the difference between asset classes, fees and returns associated with each, the importance of maintaining a diversified portfolio, and tax consequences of trades within your portfolio are just a beginning to the knowledge you will need.
Hand in hand with knowledge is the discipline to invest. Someone has to send in a check every month and decide on appropriate investments. Similarly, a DIY investor must be willing to review their investment performance and regularly rebalance the portfolio. As important, while the media screams the sky is falling when stocks crash, a DIY investor must weather it (and even consider investing when stocks are on sale). Going against the tide might be the hardest aspect to master.
For all this work, you pay fees to no one (except the fund fees or for commissions placed through your brokerage) and can trade any asset you choose.
You don’t have to choose just one
Depending on your stage of life, it’s perfectly okay to start with a robo-advisor or low-cost index fund as you learn about financial planning. Once you have gained more knowledge and experience, you can still invest through a robo-advisor and open an online brokerage account for active trading.
Often by mid-career, people have several accounts (retirement plans through work, IRAs, brokerage accounts) that they may have ignored due to the challenges of raising children or moving up the corporate ladder. Organizing these is a good step for a DIY investor or it may persuade you to call in a financial advisor.
By retirement, the other side of the equation hits. How do I take money out of my account without running out? How do I maximize Social Security? Here too, you can continue investing on your own but could call on a financial professional to review how to set up a plan for steady income.
If you want to become a DIY investor but aren’t yet ready
Learn about financial planning. Don’t wait to start learning – there are books aplenty, online courses and videos, and in-person college classes. At the same time, consider opening an account through one of the robo-advisors or save money in an index mutual fund.
If you don’t want to pay their management fees and can access one of the free robo-advisors, you can consider using their plan and investing in the funds on your own. This is sort of a mid-step where you aren’t really a DIY investor but you are saving fees that you’d pay to the robo-advisor. However, be sure that the funds you invest in through your online broker don’t end up costing you more than you would have paid through the robo-advisor.
Remember to rebalance your portfolio regularly. This means that if you allocated 50% in a large-cap stock index fund and it rises to 60% of your portfolio, you should sell part of the gains or invest new dollars to buy other funds in your plan that have lost money. Rebalancing is one of the major selling points of robo-advisors. If you’re not motivated to do this, it might be best to use their service and pay the fees.
When you’re ready to go completely DIY, start slowly. Consider starting with a set percentage of your investable funds, perhaps less than 10%. One way to accomplish this is to split your ongoing contributions between your current account and a self-directed account. Assess your DIY portfolio performance regularly, looking not only at what did well but areas where you may need more investing knowledge or mistakes that you need to overcome.
If you are comfortable and confident with your abilities, you can move your money out of the robo-advisor or simply send all ongoing contributions to your self-directed account. If you move money from a taxable robo-advisor account, you will more than likely owe money to Uncle Sam.
Start Investing Now
Whatever you decide, it’s important to start investing now, especially for retirement. Don’t let the decision of whether or not to use an advisor keep your money in the bank earning little or no interest. Make a choice. If it doesn’t seem to be achieving your goals, choose another. And even if you choose a financial professional, read an investing book or two. It’s best to understand what they are advising instead of just following along blindly.