If you are looking for a simple low-cost investment management approach you might be interested in a fairly new technology being offered by a major brokerage firms as well as some independent startup companies.
This technology is often called Robo advisors.
The good news is for a very low fee, about one quarter of one per cent, you end up with a diversified investment portfolio typically made up of index mutual funds. One big brokerage firm even claims to provide this service for free!
What they don't do a good job of telling you is that a big chunk of your money will always be invested in a money market fund that the brokerage firm owns. Can you say conflict of interest three times fast?
Unfortunately, low cost is not always the best approach. Any competent financial advisor knows that there are two important components to determining an appropriate investment portfolio.
The first is to know what your goals are. If you don’t know your destination then it’s very difficult to plot the best way to get there safely. None of the Robo Advisors will ask you about your goals. We even confirmed this for ourselves by visiting a handful of the websites.
What we found were typical questions like:
What is your current age?
What is your after-tax income?
Are you single, married, kids, no kids, already retired?
The value of all your liquid investments – savings, CDs, mutual funds, IRAs, 401(k)s, etc.
The problem is none of these questions have anything to do with your individual goals. Like when you want to retire and the cash flow you’d like during retirement. Whether or not you have a pension. Do you want to fund college for your kids or grandkids, do any charitable giving, and what about travel and any home improvements you want to make?
None of these questions are asked. But they’re very important to know don’t ya think?
The second component is to know about the risk level of your investment strategy. While all of the Robo Advisors have some kind of risk tolerance questionnaire, none of them really give you clear picture of what that means to you.
For instance, what is the maximum level of loss in a single bear market? For example, if you started with $1 million is your maximum loss in a bear market $50,000 or $500,000? That’s kinda important stuff don’t you think?
If your nest egg isn’t large enough yet to use an independent financial advisor, then I think using a Robo Advisor could make sense. Ití’s certainly a lot better than buying expensive mutual funds and annuities from insurance agents and brokers.
But if you are already retired or close to retiring, you really should use a fee-only financial advisor to help you make smart choices about your money. They will ask you the really important questions that none of the Robo Advisors do, to make sure you’ve got the best chance possible of experiencing your own personal version of an incredible retirement – doing what you want, when you want.