Even though I don't use a Robo, and I don't think you should either
One of my favorite podcasts (Stacking Benjamins) hosted a panel discussion on what the experts get wrong (based on this guest post from Budgets Are Sexy). The conversation turned into a hate fest for so-called robo advisors.
Do you know what a robo advisor is? Do you know what they do? My guess is that you can answer yes to both questions. I assume that because you're reading a personal finance blog. Even my mom doesn't read this blog, so it's fair to assume that your a nerd. If so, you shouldn't use a robo-advisor.
On the other hand, you should recommend using a robo advisor. These are my top seven reasons why.
A lot of people are greedy
In case you're wondering, a robo-advisor is an algorithm that does the following: buys equity funds (groups of stocks), bonds, real estate trusts, and precious metal funds. They use a fancy equation to keep the balance of stocks, bonds, real estate and precious metals in a perfect proportion based on your goal. It's all based on modern portfolio theory.
You can easily do everything that a robo advisor does by yourself. It takes no more than 90 minutes to learn the fundamental principles. I write about it frequently at DIY.Fund.
But, honestly, I don't care that it only takes 90 minutes to learn. Some people are greedy. They want to get rich quick. Usually, greedy people lose a lot of money on get rich quick schemes. A robo-advisor isn't a get rich quick scheme. But it's fancy sounding, and it might just save people from their greed.
A lot of people are lazy
Ideally, every person would choose investments ideally suited to their ideals, their personality and their need for returns. That's why Rob and I invest more in real estate than in the stock market.
Do you know what it takes to figure out the ideal investment vehicle? Hard work.
Even the much lauded fee only financial advisor won't help you find the perfect investment vehicle. I'm not knocking fee only financial advisors. I think they do important work. They will help you with a financial plan. They will help you stay invested in the stock market. They will help you avoid big errors. But they won't find perfect investments for you. That's not their job.
Most people don't want to do the work of finding the perfect investment. They already did the work of saving. Let's cut people a break. Let them use Robo Advisors if they don't really want to think.
Who cares if its a rip off. It's a small ripoff, and it gets people investing.
Suboptimal > Spent
Saving money is hard. If you hold onto money too long, you'll probably spend it. I would much rather have someone invest with a Robo advisor than spend their money. That's the decision most people face, so to most people, I recommend a Robo Advisor.
Marketers add value
Robo advisors are one part technology and 20 parts marketing. Do you care that you're paying for marketing? I don't.
Robo advisor marketing tells people the kind of people that they are. You are responsible. You make wise choices. You save for the future. You outsource hard decisions. You automate responsibly.
Does that add value? I think it does. It gives people the right idea of what to do with their money.
Obviously, I'm biased. I'm a marketer. I don't care. I think I add value.
Better a robo than me!
Do you know how many people ask me how to invest their money? A lot.
Do you know how often the amount they have to invest is less than $20K? 100% of the time.
I think most people should invest their $20K in producing more income. Buy a franchise, start a business, flip real estate. But my advice will probably lead to losing all $20K. Better a robo advisor screw over my friends and family than me.
PS- Robo advisors are much more risk averse.
Pick the right battles
I don't often write about investing because most people struggle with spending less than they earn. The struggle with making intelligent debt choices. They struggle to build a lifestyle that makes financial sense.
A .35% robo advisor fee is so far from the right battle. I'll happily recommend anything that gets people moving towards financial freedom.
Even intelligent people suck at investing
I live with two men who have a Masters Degree in Engineering. (One is my husband, the other our housemate). These braniacs dutifully saved money and invested in mutual funds.
Do you know how they were invested? Both had over a dozen mutual funds.
Do you know how they both picked the funds? Based on the prior ten year performance at the time of buying.
Did they know the term portfolio? No they did not.
They researched specific investments, but they had no framework for investing. A robo advisor provides a framework. And they make sure you don't deviate from it.
How do you feel about robo advisors?
I suppose I would be remiss not mention any robo advisors in this whole post.
Wealthfront is pretty good. If you want to do permanent portfolio theory, I recommend Wavelength Capital. Stash is good if you only have a few bucks to invest.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.