7 Reasons Why You Should NOT Use A Robo-Advisor
Robo-Advisor are springing up everywhere like mushrooms, offering their services to investors with warm words.
Automated advice, automatic rebalancing and graphic evaluations in flashy-hued colors.
These are basically the services that these providers want to sell to you. Of course, in exchange for a practical all-in-fairy, say percent of your fortune.
I now had plenty of time to look at the offers on the market and came to the conclusion that no one needs such Robo-Advisor.
Why and why do I want to explain you more precisely for 7 reasons. Then, of course, I would be interested in your opinion on the subject.
So let’s go!
- What is a Robo-Advisor?
- 1. Robo-Advisor are expensive
- 2. Robo-Advisor want to replace basic financial education
- 3. Robo-Advisor are another middleman
- 4. A Robo-Advisor is not a consultant
- 5. Even more paperwork to manage
- 6. Nobody pats you on the shoulder (or in the face)
- 7. The tax code remains the same
- Conclusion: Robo-Advisor are pretty useless and too expensive
- You think this post is good? Then support Homemade Finance!
What is a Robo-Advisor?
A robo-advisor is ultimately a kind of automated consultation over the Internet without a human being being involved.
You’ll be asked a few questions to determine your risk tolerance and investment preferences and, based on that, you’ll get some suggestions.
Depending on the provider, you can then have them implemented directly by the Robo-Advisor and if you wish, he will automatically rebalance your portfolio in the future .
In general, there are two types of robo-advisor.
For one thing, those who try to tell you they can actively shuffle your fortune between different securities or asset classes so that in the end, something better than the market return for you pops out of it.
And secondly, those who implement and rebalance a recommended, ready-made, passive portfolio in its original composition so that everything stays as it is.
The former type of robo-advisor is therefore active and undoubtedly doomed to failure, as are all the active fund managers, market timers and copy-traders out there, who underperform in good regularity.
That’s a scientific fact (see here , here and here ) and that’s why we will not even look at this species.
We limit ourselves here to the providers who want to help you to better implement a passive ETF portfolio .
In addition, the passive ETF portfolio is differentiated between two other forms:
1. Pure consulting tools, so in the end a pure software / web application that spits you recommendations and then you even implement in your own depot.
2. Asset Management, which not only gives you recommendations, but also fully automatically implements them.
Their raison d’être justifies Robo-Advisor by making it easier for investors to start a diversified stock market engagement and to manage their deposit comfortably.
To be honest, I do not think so, because what the Robos mostly advise are simply simple ETF deposits and you can knit them cheaper as well as supersimpel themselves.
But I am a friend of rational arguments and to convince you of my opinion, I have collected my reasons here and would like to share them with you, of course.
1. Robo-Advisor are expensive
Let’s not talk about the bush anymore. As so often in life, there is a big catch that makes the countless other small hooks next to it look like waste paper.
Almost like a whaling harpoon next to a fishing line with worm below.
In the case of Robo-Advisor, this harpoon costs.
Because their services let the providers pay very well.
An example, without naming a specific provider by name, because I do not want to advertise here:
0.75% of the portfolio + 0.25% Total Expense Ratio of the ETF
As I see it, this provider would have liked to pay around three times the price of its offer as an ETF alone.
Threefold, mind you.
And honestly, the service is never worth it, in my opinion.
Because what do I get exactly for it?
A questionnaire to get you started, a pre-selection of funds, a bit of rebalancing once a year and maybe even an app.
I’m really sorry, but I certainly do not put 0.75% pa on the table.
These are things that I can easily make cheaper, even if I consider the value of my own time.
Of course, there are cheaper providers on the market, some of them starting at 0.25%. But even then cost you the fun in addition as much as an average ETF to which it actually goes here!
Not about any additional advisory buhei around it.
And you have already read it often enough: Costs are virtually the only thing that we can influence in our favor.
So why start spending a lot of money for little added value now?
2. Robo-Advisor want to replace basic financial education
One point that interests me personally is the fact that Robo-Advisor is basically trying to replace financial education.
Hey man, there is no reason to deal with this bland financial instrument. Just leave it to us!
This is the core message behind the robos and it causes me mixed feelings.
For one thing, it might encourage people who have not yet been on the stock market to finally do so.
And this mostly through a broadly diversified portfolio at a price that is a bit too high but not overly excessive overall.
Of course, that’s great, because my goal is to get more people excited about the stock market.
On the other hand, on the other hand, I also want people to really deal with it and not just put their money in the hands of anyone and say:
Come on, do that.
My ultimate goal is to provide you with financial knowledge that will advance you on your path as a self-determined investor.
Not as a dependent puppet of any consulting service.
Knowledge is everything and while Robo-Advisor may be able to get more people involved in equities, they also provide an incentive not to engage in more fundamental finance.
And that’s a pity. Because what you can learn can be applied to many more areas of life, not just stock market and money.
Sometimes in areas where you might not think it possible.
Therefore, I am not only objectively, but also personally the Robos very skeptical.
3. Robo-Advisor are another middleman
There is a certain, albeit somewhat simplified ideal, if you want to invest in a company:
You go, hand in your money and get a security from the company of your choice.
Only in the rarest cases is it just so direct. You almost always have to buy securities on the stock market.
But now you can not just go public on the stock market and then keep your securities at home. You need a broker for both, who will give you access first and then keep your property safe.
So this is another middleman between you and the company:
And it goes even further because we both know that you should ALWAYS invest diversified.
With normal sized assets and saving rates, this is only possible to a limited extent. For example, with 500 € a month I can not buy any company in the world at the same time.
With ETF, we can do that now, at least approximately.
This, however, requires another middleman between you and the companies:
The problem with middlemen is that they always cost you. Anyone passing on a security to you, so to speak, wants to be paid by the buyer, that is, you.
There are middlemen we CAN NOT do without. These include the stock market and brokers, because without them, it simply would not work. Only then will we have access to the capital market.
Then there are middlemen we DO NOT want to do without.
I count ETF providers.
We want the widest possible diversification and without iShares & Co. we would not be able to do that with our small sums. Therefore, the advantages clearly outweigh the costs and we let the middleman join the stock market as well as brokers.
Robo-Advisor would now like to do the same and join in the illustrious series. This is justified by the colorfully advertised features that they offer you.
But I have to say here that in my opinion costs and benefits for you in no advantageous relationship to each other.
Eliminate the middlemen!
4. A Robo-Advisor is not a consultant
Even though Advisor, or consultant, may be in the name of it, the robos are, just as funnily enough, barely able to:
Almost every provider is limited to a handful of simple questions about your risk attitude and on the basis of this, you will then be suggested an “individual” matching between stocks and bonds.
That’s it with the advice.
This is abundantly unspectacular and raises a bit the question of why the providers call their service “advisor”.
Because if you put it more meanly, then you could call Robo-Advisor as expensive brokers / agents with limited offer and a multiple-choice test for new customers.
To what extent this should help you on your way to your goals, that just does not open up to me.
If you want a consultation (which may be legitimate, because sometimes it is wise to buy external know-how) then you should stick to a real person.
Because this can respond to you again more individually than a Robo-Advisor will ever do.
If you absolutely need someone by your side, then you’d better put some money into it and get a decent solution, rather than something semi-solid like a standardized questionnaire on the internet.
This leads us directly to the next reason:
5. Even more paperwork to manage
I have said it many times, but again: I hate paperwork .
Each of us already has way too much of it anyway, so I make sure that it only gets as slow as possible.
That’s exactly the case when using a Robo-Advisor.
Especially when the robo just suggests and in the end you do the dirty work yourself.
Then, in addition to the unavoidable paperwork of your broker, you have the avoidable paperwork of your robo-advisor on top.
That means a lot of additional fine print and again additional understanding of another level of fees.
Zero buck on it, if I can formulate it so timidly.
6. Nobody pats you on the shoulder (or in the face)
If you already need an advisor, what should you look for?
N / A?
On plenty of Muckis.
Because a good consultant has exactly two ongoing tasks:
1. Face Slapping when the market is rising and you run the risk of being overconfident. Keyword buy on credit.
2. You kick in the buttocks when the market is running badly and you run the risk of getting cold feet. Keyword next financial crisis .
A Robo-Advisor can not do both, and a push notification on a cell phone or an e-mail is far less effective than a Conan the Barbarian Schwarzenegger in a suit on your doorstep.
Scientific studies prove that.
An advisor needs to be able to keep you on track if you run the risk of doing something stupid. How to sell when it gets worse.
7. The tax code remains the same
An aspect in which Robo-Advisor could actually score points is, paradoxically, left to the left:
The steering wheel.
I think that’s a point where many investors would want more service and would be willing to pay for it.
More like a Robo-Tax-Advisor.
Which number do I have to enter exactly where? What special features do I have to consider? What can I optimize?
For that I would probably even willing to give some return, if these things would run as automated as possible.
Why does not anyone offer that yet?
Well, probably because it would be very complicated, both from the topic and the implementation and since every few years also something changes, see, for example, investment fund tax reform law.
Therefore, not really anyone has ventured on this point.
That’s a pity.
Conclusion: Robo-Advisor are pretty useless and too expensive
Basically, I find the idea of Robo-Advisor not so wrong.
He once again takes the complexity out of setting up and maintaining his own ETF portfolio and packages it in the form of chic graphics that are eye-pleasing to the consumer.
Actually very nice.
The crux is:
This service is never worth 0.75%, 0.50% or even just 0.25% per year.
I’m sorry, but even with a normal broker , it’s not rocket science with its own ETF depot to get started and then the thing from time to rebalancen .
It is not that complicated and requires almost no time.
In addition, some brokers also offer quite nice graphical evaluations of the composition and development of your portfolio and what you are missing, you can also carve yourself in Excel.
All in all:
The nice features that Robo-Advisor offers you are just that and nothing more:
The point is: you really do not need them. Especially not for this price.
I happily forego high-resolution graphics in some flashy apps if I can get 0.75% more return in return.
After all, we finally went public:
To make more profit.
Robo-Advisor does not really help you with that and that’s why I say:
No unnecessary frippery.
Only you, your head stuffed with homemade finance know-how and Excel against the rest of the world.
Because that’s all it takes.