Are Bogleheads too harsh on robo-advisors?

[silent cal]

Hi everyone,

There are dozens and dozens of threads on here of people asking if they should use a robo-advisor or how to move from their current robo-advisor to something like the three-fund portfolio. The overwhelming consensus on here seems to be not to use a robo-advisor and DIY.

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?

I'll stick with Betterment since I know it best having used it before moving to Fidelity and implementing the 3-Fund portfolio. The fee is 25 bps, plus the underlying ETFs for an 'all-in' fee of let's call it 30 bps. Vanguard TDFs have an expense ratio of 8 bps, so the 'premium' Betterment is charging is roughly 22 bps.

For this fee you're getting (along with most robos to my knowledge):

• A Boglehead-like portfolio of low-cost index funds covering global stock and bond markets

• Automated rebalancing

• Automated reinvestment of dividends & interest

• Automated asset location across accounts

• Automated tax-loss harvesting

• Automated glidepaths

• Automated capital gains management

• Cash management options with competitive rates

• A goals-based approach to investing and cash goals for mental accounting purposes

• Built in planning tools

• Behavioral 'nudges' as Betterment historically has pushed 'stay-the-course' notifications to clients apps during volatile markets

Now as Bogleheads we know none of this is worth 22 bps from any kind of quantitive perspective. I don't believe asset allocation, asset location, rebalancing, or TLHing can overcome the 25 bps fee, especially compared to something like a 3-fund portfolio.

But how realistic is it that the 'average' American will have the motivation or interest to take the time to educate themselves enough to learn about the 3-fund portfolio and then follow through implementing it? How many people push investing off entirely because it overwhelms them? And by extension, how many people then pay an advisor 100 bps for something Betterment can do better and for less in fees because they feel overwhelmed?

What are your thoughts? Should robos be removed entirely from the investment discussion? Or might they have a place? Could a tool like Betterment be considered 'Boglehead-lite'?

[Dottie57]

No bogleheads arenot too hard on robo whatevers.

Why pay someone for something you can reasonably do yourself

Not hard. Look at the wiki.

A Simple portfolio of funds works well.

If average joe enjoys spending money and wants a comfortable retirement, average should learn about investing part of income.

[Doctor Rhythm]

I don't particularly see an anti-robo sentiment in this forum. We're mostly DIY, and that is often presented as the optimal strategy for those who can do so. However, not everyone can or wants to manage their portfolio. For them, a low cost service like Vanguard PAS or a "robo" advisor are both reasonable. The obvious advantage of Robo is lower cost. The downside (to me) is that it sort of fits in between DIY with a target date fund (thus saving more money) and paying a little bit more to have a human to talk to (which I suspect many who don't self-manage feel the need for).

If I couldn't DIY, I would turn my portfolio over to our benevolent and infallible synthetic overlords.

[bonesly]

how realistic is it that the 'average' American will have the motivation or interest to take the time to educate themselves enough to learn about the 3-fund portfolio and then follow through implementing it?

For the "average" American with poor financial literacy, a robo is a great alternative to a commission-based advisor, but the average American wouldn't likely know to avoid the sharks at Edward Jones, Franklin Templeton, or Merril Lynch. The average American probably wouldn't end up here on Bogleheads.org asking about "I'm new, but I learned enough to come here and ask what next?" The average American either doesn't have any retirement savings, or is taking hot tips from coworkers around the water cooler or from friends and family that also have low financial literacy (blind leading the blind).

Investors that do make it to these boards probably have enough of a clue to want to learn and enough smarts to know that they should do better with their investments. They may not be DIY types, but they know their investments are sub-optimal or that they're paying too much to their advisor. If they know that much, they can learn to DIY. If they truly don't want to DIY, they just want a better setup at lower cost but not to manage it, I don't think the majority here would dissuade them from using a robo-advisor.

To reiterate, I don't think the average American would find this forum or bother posting here if they did find it. They'd be watching Dave Ramsey or (better) Suze Orman or some other TV/streaming personality.

[silent cal]

how realistic is it that the 'average' American will have the motivation or interest to take the time to educate themselves enough to learn about the 3-fund portfolio and then follow through implementing it?

For the "average" American with poor financial literacy, a robo is a great alternative to a commission-based advisor, but the average American wouldn't likely know to avoid the sharks at Edward Jones, Franklin Templeton, or Merril Lynch. The average American probably wouldn't end up here on Bogleheads.org asking about "I'm new, but I learned enough to come here and ask what next?" The average American either doesn't have any retirement savings, or is taking hot tips from coworkers around the water cooler or from friends and family that also have low financial literacy (blind leading the blind).

Investors that do make it to these boards probably have enough of a clue to want to learn and enough smarts to know that they should do better with their investments. They may not be DIY types, but they know their investments are sub-optimal or that they're paying too much to their advisor. If they know that much, they can learn to DIY. If they truly don't want to DIY, they just want a better setup at lower cost but not to manage it, I don't think the majority here would dissuade them from using a robo-advisor.

To reiterate, I don't think the average American would find this forum or bother posting here if they did find it. They'd be watching Dave Ramsey or (better) Suze Orman or some other TV/streaming personality.

So it's almost like the problem with robo-advisors is it's not clear who they're 'for' exactly. Someone with no knowledge of personal finance wouldn't know enough to use one, and someone with enough interest in their finances would know enough not to need one?

I wonder if the 'default' recommendation should be to utilize a robo-advisor if it might encourage some people to start investing who otherwise wouldn't have, but then recommend someone move to Fidelity/Schwab/Vanguard and self-manage if they have the desire to do so?

[Wiggums]

The Bogleheads forum is a platform to discuss investment advice inspired by Jack Bogle. I see Robo advising as a service that sits between “do it yourself” and “active management”. I.e., For people that want to be hands off, and don't need an human advisor to speak with. For the same cost, PAS provides a human to answer questions. Target date, balanced, and lifestrategy funds work well in some other than taxable accounts.

[BitTooAggressive]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

[PersonalFinanceJam]

I wonder if the 'default' recommendation should be to utilize a robo-advisor if it might encourage some people to start investing who otherwise wouldn't have, but then recommend someone move to Fidelity/Schwab/Vanguard and self-manage if they have the desire to do so?

I think the average Joe doesn't really need an advisor be it a robo or otherwise. They don't have enough money for most of the things on your list to really matter. They should be using low cost target date funds in their tax advantaged accounts and probably bank savings/CDs for anything left over since those funds will probably eventually be spent. They do need some guidance as they approach retirement or their kids college attendance but I really don't see a lot of that offered in what I consider a good form either. Everyone wants to charge ongoing AUM management fees.

As you get into the mass affluent is where I could see a robo providing some value but most are probably not going to understand a robo and want "a guy" anyway. Those who self educate will be part of the DIY crowd.

[stan1]

I think folks here would tend to recommend a target retirement fund in IRA/401K accounts rather than a robovisor. In a tax advantaged account, they are about the same thing and target retirement accounts are usually lower cost.

[Doctor Rhythm]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

I think this forum overestimates the ability and willingness of the average person's ability and confidence to self-manage their investments. TDFs, Robo, and low cost advisors are all options that they can consider depending on what they are comfortable with. For a few people, even a more costly AUM advisor is better than DIY.

[Wanderingwheelz]

Any question that begins with “Are Bogleheads too harsh on…”

The answer is almost always yes. Roboadvisors included.

[bd7]

There's no reason for someone using a robo-advisor to post here, and they'd get run off the board anyway with the amount of snide and sarcastic remarks their content would generate.

Well then I'll be the test case. I have an MS Access account where they ask you to select an aggressiveness level and a cost level. You can go from "don't lose my money" to "speculation" (they use different words) and then you can choose from "low-cost" or "high-cost" funds (passive or active). I chose low-cost, of course, and then the "don't lose my money" option. They put everything into the same 9 or 10 funds regardless of your aggressiveness and just vary the proportions. I've changed my aggressiveness twice and still see the same funds. It has performed pretty much as expected and the charge is 35bp, which includes rebalancing and TLH if wanted.

The funds are mostly single-digit ER large ETFs--IEFA, IEMG, IJR, ITOT, AGG, JPST, SPMD, SPLG and VCIT. I don't see the problem with this. It isn't a large portion of my assets as I only have it because I'm sort of stuck with it, but if I didn't have time to think about investing I really don't see how my MS robo-friend would be seen as doing me a disservice. One could just set a monthly automatic investment into the account and forget about it for a decade or so with pretty good results. I, for one, would be a lot better off right now if I'd had this option a few decades ago and had done it rather than what I did do.

[bonesly]

For the same cost, PAS provides a human to answer questions.

Minor quibble, Van Digital Advisor is 0.15% while PAS is 0.30%; the cost is not the same.

See Vanguard Advice Services, scroll down to "Compare advice options" and look at the 2nd row for annual advisory fee.

[Dave55]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

I think this forum overestimates the ability and willingness of the average person's ability and confidence to self-manage their investments.

You are spot on!

Dave

[nisiprius]

Can robo-advisors be trusted to maintain a stable and consistent strategy?

Yes, Wealthfront initially put clients into "A Boglehead-like portfolio of low-cost index funds covering global stock and bond markets." And then, more or less out of the blue, in 2018, they abruptly changed the allocation to put 20% of the portfolio into their newly-minted risk parity fund. They did it on an "opt-out" basis. That is, they did it automatically to any client who didn't specifically tell them not to.

Risk parity has its fans, but it is not part of the Bogleheads' investment philosophy, nor it is a popular variation on the three-fund portfolio. The Wealthfront risk parity fund has actually lost money since its inception. I think very few do-it-yourselfers would have bought into this fund on their own. And thus most do-it-yourselfers would have managed their portfolio better than the Wealthfront roboadvisor.

Source

[gavinsiu]

My question is what value robo advisor add over a target or life strategy fund. If you are just investing in tax deferred vehicles like 401K or IRA, I don't seem how much value a robo advisor will add. What would be helpful if the tool helps the person make decisions. If I save 20% more can I figure 10 year earlier. Can I calculate how much social security I will have? Can I fund my kids's college, etc. One problem with such a tool would be that it also need to educate the person that it is not reality. Human and AI can estimate but may be off.

The other issue I see with robo advisor is that many implement the same dark pattern as human financial advisors. Instead of a 3 fund portfolio, you end up getting a 15 asset class because the customer feels they are not getting their money's worth. In the case of Schwab, I have seen reviews that they purposely add a high cash position with low interest rate instead of charging, so it's obscuring the payment.

[Harmanic]

The other issue I see with robo advisor is that many implement the same dark pattern as human financial advisors. Instead of a 3 fund portfolio, you end up getting a 15 asset class because the customer feels they are not getting their money's worth. In the case of Schwab, I have seen reviews that they purposely add a high cash position with low interest rate instead of charging, so it's obscuring the payment.

There was a lawsuit that resulted in Schwab offering better rates for the cash holdings of the robo advisor.

[Sandtrap]

Hi everyone,

There are dozens and dozens of threads on here of people asking if they should use a robo-advisor or how to move from their current robo-advisor to something like the three-fund portfolio. The overwhelming consensus on here seems to be not to use a robo-advisor and DIY.

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?[/b]

I'll stick with Betterment since I know it best having used it before moving to Fidelity and implementing the 3-Fund portfolio. The fee is 25 bps, plus the underlying ETFs for an 'all-in' fee of let's call it 30 bps. Vanguard TDFs have an expense ratio of 8 bps, so the 'premium' Betterment is charging is roughly 22 bps.

For this fee you're getting (along with most robos to my knowledge):

• A Boglehead-like portfolio of low-cost index funds covering global stock and bond markets

• Automated rebalancing

• Automated reinvestment of dividends & interest

• Automated asset location across accounts

• Automated tax-loss harvesting

• Automated glidepaths

• Automated capital gains management

• Cash management options with competitive rates

• A goals-based approach to investing and cash goals for mental accounting purposes

• Built in planning tools

• Behavioral 'nudges' as Betterment historically has pushed 'stay-the-course' notifications to clients apps during volatile markets

Now as Bogleheads we know none of this is worth 22 bps from any kind of quantitive perspective. I don't believe asset allocation, asset location, rebalancing, or TLHing can overcome the 25 bps fee, especially compared to something like a 3-fund portfolio.

But how realistic is it that the 'average' American will have the motivation or interest to take the time to educate themselves enough to learn about the 3-fund portfolio and then follow through implementing it? How many people push investing off entirely because it overwhelms them? And by extension, how many people then pay an advisor 100 bps for something Betterment can do better and for less in fees because they feel overwhelmed?

What are your thoughts? Should robos be removed entirely from the investment discussion? Or might they have a place? Could a tool like Betterment be considered 'Boglehead-lite'?

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?[

to op:
questions:
1
What does "next best thing" mean?
Next best thing compared to what alternative?
A fee only financial advisor?
What?

2

the average Joe with little education or interest in investing?

Please clarify: who is "average Joe"?
a) W2 employee who collects a paycheck and is vaguely aware that the "company pension plan" sets aside money for the future?
b) W2 employee with basic public education and is financially illiterate per se, beyond the concerns of earning money and spending money.?

4
You mention "Betterment" several times. Has that worked out better for you than other investment finance paths?
What other paths have you tried.?

As an aside: "Boglehead" senior experienced portfolio reviewers are anything but formulaic. That comprehensiveness and perspective is not common.

j

[student]

• Automated tax-loss harvesting

I actually do not consider this as a plus. Unless you only have one account, this may create a wash sale. I would go with a target date index fund. Personally, I think 3-fund portfolio with asset location consideration > 3-fund portfolio per account > target-date per account > robo advisor per account.

[CletusCaddy]

Now as Bogleheads we know none of this is worth 22 bps from any kind of quantitive perspective. I don't believe asset allocation, asset location, rebalancing, or TLHing can overcome the 25 bps fee, especially compared to something like a 3-fund portfolio.

I disagree with this statement pretty strongly so I guess I agree with your point?

[gavinsiu]

One advantage with a target fund over a robo advisor is that they are widely used by a lot of institutions. As a result, there are probably quite a bit more scrutiny than robo advisors. How much can you trust that the company won't make changes to the advisor to make them more money in the future.

One question that is not answered. What does Robo advisor do above portfolio construction?

[student]

One advantage with a target fund over a robo advisor is that they are widely used by a lot of institutions. As a result, there are probably quite a bit more scrutiny than robo advisors. How much can you trust that the company won't make changes to the advisor to make them more money in the future.

One question that is not answered. What does Robo advisor do above portfolio construction?

Most do tax loss harvesting. However, I don't think it is an advantage unless it has all your money, otherwise, one may have to deal with wash sale.

[Big Dog]

Hi everyone,

There are dozens and dozens of threads on here of people asking if they should use a robo-advisor or how to move from their current robo-advisor to something like the three-fund portfolio. The overwhelming consensus on here seems to be not to use a robo-advisor and DIY.

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?

I'll stick with Betterment since I know it best having used it before moving to Fidelity and implementing the 3-Fund portfolio. The fee is 25 bps, plus the underlying ETFs for an 'all-in' fee of let's call it 30 bps. Vanguard TDFs have an expense ratio of 8 bps, so the 'premium' Betterment is charging is roughly 22 bps.

For this fee you're getting (along with most robos to my knowledge):

• A Boglehead-like portfolio of low-cost index funds covering global stock and bond markets

• Automated rebalancing

• Automated reinvestment of dividends & interest

• Automated asset location across accounts

• Automated tax-loss harvesting

• Automated glidepaths

• Automated capital gains management

• Cash management options with competitive rates

• A goals-based approach to investing and cash goals for mental accounting purposes

• Built in planning tools

• Behavioral 'nudges' as Betterment historically has pushed 'stay-the-course' notifications to clients apps during volatile markets

Now as Bogleheads we know none of this is worth 22 bps from any kind of quantitive perspective. I don't believe asset allocation, asset location, rebalancing, or TLHing can overcome the 25 bps fee, especially compared to something like a 3-fund portfolio.

But how realistic is it that the 'average' American will have the motivation or interest to take the time to educate themselves enough to learn about the 3-fund portfolio and then follow through implementing it? How many people push investing off entirely because it overwhelms them? And by extension, how many people then pay an advisor 100 bps for something Betterment can do better and for less in fees because they feel overwhelmed?

What are your thoughts? Should robos be removed entirely from the investment discussion? Or might they have a place? Could a tool like Betterment be considered 'Boglehead-lite'?

The average American can get all of the above from an Age-based/Target Date fund. Set it and forget it.

In my opinion, that is the "best thing" for the "average American."

[Squirrel208]

The overwhelming consensus on here seems to be not to use a robo-advisor and DIY.

Yes.

But it's not because we're "too harsh". It's because we're financially frugal, enlightened, empowered, and aspire to manage own own finances, rather than paying precious basis points to someone else to do it for us. That's pretty much the whole point of becoming and being a Boglehead.

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?

No.

Well, maybe. "Next best thing" to what, exactly?

"The average Joe with little education or interest in investing" is not a typical Boglehead, and is not likely to become one.

[SmileyFace]

Agree with 2 points made by 2 other posters:
1) roboadvisors simply don't fit into "investment advise inspired by John Bogle"
2) Target Date Funds make more sense to the average joe versus a roboadvisor. I would venture to guess a roboadvisor won't beat a Target Date Fund considering the higher price of the roboadvisor.

[tarantula13]

The greatest thing for investing that has happened to the general public is their 401ks automatically going into target date funds. There are so many people that are financially illiterate and that's okay, but simplicity is extremely valuable. To Bogleheads, 25 bps seems like a massive ripoff and you can do the compound cost of what that would be over a lifetime, but no one considers the behavioral costs. So many people try to do the right thing and open an IRA at Vanguard and fund it, then never invest it. Or they listen to what their coworker told them to do. Or they hear everyone around them to just buy the S&P 500 and if they lose money they think they made a mistake and sell not fully comprehending the risk they took.

Having an account you can just dump money into that will be invested for the long run, be properly diversified, and rebalanced periodically is worth the cost for most people. You can tell friends and colleagues to open a brokerage account and setup an automatic buy on a target date fund until you're blue in the face, but that doesn't mean they will actually execute it correctly. Most of these services also come with advisors you can talk to over the phone as part of the fee you're already paying, so they can help them stay the course and have the proper risk tolerances.

For people on these forums that can do it themselves, they should. But for people who can't a robo is a fantastic alternative.

[Yvy]

I personally find the bogleheads in general to be tone deaf with some of the life reality. Therefore, yes they are harsh on robo advisors.
Even to open a brokerage account and put money in a target date fund, you need to know what a target date fund is. The average joe does not. You can be a boglehead with the require knowledge but lack the time, the courage or have behavioral issue. I will say to adapt any recommendation to your personal situation and how comfortable you feel. What the majority does might not always suit you and you don't have to be a DIY. Saving and investing is the most important.
In a set and forget approach, Target date funds, robot advisors are all good options. In a taxable, a robot advisor likely is a better fit for tax saving purpose than a target date fund with a mix of stocks/bonds. In a retirement account, a target date fund will be better if low expense ratio.

[the_wiki]

There are robo advisors (stash, acorns) that charge a flat fee as low as $3 a month. That is a high fee at the start, but once you have more than $15000 it is a much cheaper fee than 0.25%. It’s only .036% on a $100k


Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

[bonesly]

I personally find the bogleheads in general to be tone deaf with some of the life reality. Therefore, yes they are harsh on robo advisors.
Even to open a brokerage account and put money in a target date fund, you need to know what a target date fund is. The average joe does not.

I agree with this statement that the average Joe is not going to open a brokerage account, but they maybe get this below...

The greatest thing for investing that has happened to the general public is their 401ks automatically going into target date funds.

If they're auto enrolled at 3% of salary into a target date fund through their 401k work plan, then they don't need a robo-advisor. Both of my former employers (and my current consulting gig employer) provided relatively unbiased educational info about their plans and the value of saving for retirement. If the average Joe becomes above average and wants to open a Roth IRA outside of work, then hopefully they do some research and not just open a Robinhood account because their friends have that and the phone app's appearance and emoticons are pretty cool!

However, it's better that they put something into a Roth IRA somewhere than nothing at all. If they somehow decide after a time "maybe I need help with this" I do think a robo-advisor would be better than a high-cost, full-service advisor like we've seen people stuck with at Edward Jones, Merril Lynch, etc.

I doubt the majority of average Joes even have a 401k, or if they do they have to opt in (which seems unlikely if you don't have a clue about the value of starting early), but for those that do and auto enroll their employers at some nominal percentage of salary in a TDF, that's great news!

Edit to add: If the "average Joe" is earning anywhere near the median US wage of $48,060, it wouldn't surprise me that they spend everything and live paycheck to paycheck, rather than living below their means so they have some left over to save in the first place. There's a floor on basic food & shelter such that someone earning twice the median has higher feasibility of living below their means and saving.

[student]

Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

But people can get informed. Some may choose to not to learn the basic. Regarding a disturbingly large number of people leaving rollover IRA in cash, it is also disturbing that presumably they did not read the statement or log on to their account to check even once. The Bogleheads' Guide to Investing is very accessible. I remember learning about investing by taking a free "course" at Morningstar.

[yankees60]

I personally find the bogleheads in general to be tone deaf with some of the life reality. Therefore, yes they are harsh on robo advisors.
Even to open a brokerage account and put money in a target date fund, you need to know what a target date fund is. The average joe does not. You can be a boglehead with the require knowledge but lack the time, the courage or have behavioral issue. I will say to adapt any recommendation to your personal situation and how comfortable you feel. What the majority does might not always suit you and you don't have to be a DIY. Saving and investing is the most important.
In a set and forget approach, Target date funds, robot advisors are all good options. In a taxable, a robot advisor likely is a better fit for tax saving purpose than a target date fund with a mix of stocks/bonds. In a retirement account, a target date fund will be better if low expense ratio.

Well stated.

[the_wiki]

Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

But people can get informed. Some may choose to not to learn the basic. Regarding a disturbingly large number of people leaving rollover IRA in cash, it is also disturbing that presumably they did not read the statement or log on to their account to check even once. The Bogleheads' Guide to Investing is very accessible. I remember learning about investing by taking a free "course" at Morningstar.

People can’t be experts in everything. It’s ok to hand off an aspect of your life to someone else so you can save your efforts for something you enjoy.

[Yvy]

Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

But people can get informed. Some may choose to not to learn the basic. Regarding a disturbingly large number of people leaving rollover IRA in cash, it is also disturbing that presumably they did not read the statement or log on to their account to check even once. The Bogleheads' Guide to Investing is very accessible. I remember learning about investing by taking a free "course" at Morningstar.

People can’t be experts in everything. It’s ok to hand off an aspect of your life to someone else so you can save your efforts for something you enjoy.

+1000
Life is short. No every cent is worth being part of a portfolio. For some, that cent may have more value if that serves to pay for a robot advisor or even a good financial advisor.

[1moreyr]

Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

But people can get informed. Some may choose to not to learn the basic. Regarding a disturbingly large number of people leaving rollover IRA in cash, it is also disturbing that presumably they did not read the statement or log on to their account to check even once. The Bogleheads' Guide to Investing is very accessible. I remember learning about investing by taking a free "course" at Morningstar.

People can’t be experts in everything. It’s ok to hand off an aspect of your life to someone else so you can save your efforts for something you enjoy.

+1000
Life is short. No every cent is worth being part of a portfolio. For some, that cent may have more value if that serves to pay for a robot advisor or even a good financial advisor.

completely agree. I know how to change the oil in my car and could save a couple bucks to do it myself but I don't bother. It's no longer worth my time.

Now if I didn't know how, it scared me, I didn't want to get my hands dirty and I wanted an expert to handle it so I didn't screw it up, I would go to the garage anyway..... a lot of people feel that way about investments (or something like that- disclaimer needed for argumentative BH that will want me to cite a source) and getting help and investing beats getting no help and not investing.

[YeahBuddy]

My question to you is: should robo-advisors like Betterment be considered the 'next best thing' for the average Joe with little education or interest in investing?

My answer is no. Simply participating in a work place 401k (403b), choosing a target date fund, and increasing contributions over time is better than choosing a robo advisor. Then opening a Roth IRA and choosing a low cost index fund would be next best. It's quite simple and many new employees are walked through that process in their orientation or can ask HR about it. I taught my 13 year old last year.

[HKexpat]

Isn’t the value proposition of Betterment that they can do tax loss harvesting in a taxable account? That’s potentially quite valuable for someone in a higher income tax bracket. You can do this manually, but there’s a decent chance of ending up with a wash sale or otherwise poorly timed trade — and it takes time. If the alternative is that people who “buy and hold” don’t bother with tax loss harvesting, then I’d say this is worth paying a fee for. At least for portfolios under a million.

[student]

Even getting a target date fund is not that simple for the uninformed. You have to understand how mutual funds trade, and where to buy them. Many people don’t even understand you have to deposit money and then also buy a fund. I read an article where a disturbingly large number of rollover IRA get left in cash because 401k plan automated buying funds, and they don’t know the broker IRA doesn’t.

But people can get informed. Some may choose to not to learn the basic. Regarding a disturbingly large number of people leaving rollover IRA in cash, it is also disturbing that presumably they did not read the statement or log on to their account to check even once. The Bogleheads' Guide to Investing is very accessible. I remember learning about investing by taking a free "course" at Morningstar.

People can’t be experts in everything. It’s ok to hand off an aspect of your life to someone else so you can save your efforts for something you enjoy.

I agree that it is ok to hand off an aspect of one's life to someone else to save efforts. I was only saying that it does not take much efforts to understand the most basic aspects of investing such as those concepts stated in your post.

[Lastrun]

I personally find the bogleheads in general to be tone deaf with some of the life reality. Therefore, yes they are harsh on robo advisors.
Even to open a brokerage account and put money in a target date fund, you need to know what a target date fund is. The average joe does not. You can be a boglehead with the require knowledge but lack the time, the courage or have behavioral issue. I will say to adapt any recommendation to your personal situation and how comfortable you feel. What the majority does might not always suit you and you don't have to be a DIY. Saving and investing is the most important.
In a set and forget approach, Target date funds, robot advisors are all good options. In a taxable, a robot advisor likely is a better fit for tax saving purpose than a target date fund with a mix of stocks/bonds. In a retirement account, a target date fund will be better if low expense ratio.

Well stated.

I agree.

One other thing that I have not seen detailed is that most of the major brokerage firms are moving toward a hybrid model with a human element of at least s team of advisors with some limited access. I think this is valuable to the general population and would be better than a one-fund solution alone for the obvious behavioral reasons or general questions.

[lexor]

Bogleheads are not too harsh on robo advisors.

In fact, Bogleheads are too lenient on Vanguard for having higher fees than Fidelity. See viewtopic.php?t=302611.

Costs matter and they're one of the few things under your direct control.

[SmileyFace]

FWIW - our boglehead wiki page does not sound at all harsh:
https://www.bogleheads.org/wiki/Robo-adviser

[redspade]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

This is a bad take. 25bps to turn the average joe into a boglehead holding essentially VT + BND in one "account" that manages all three tax buckets in a tax efficient manner, calculating if they are on or off track with their retirement goals in an inflation and tax adjusted manner (whilst showing them how much they need to contribute to meet those goals), doing tax loss harvesting, and a glide path for the entire thing. It's essentially a TDF 2.0. 25bps won't change anyone's retirement goals. Oh and it calculates and distributes their withdrawal strategy with almost perfect success. And all they have to do is turn on auto deposits.

Really bad take.

[lexor]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

This is a bad take. 25bps to turn the average joe into a boglehead holding essential VT + BND in one "account" that manages all three tax buckets in a tax efficient manner, calculating if they are on or off track with their retirement goals in an inflation and tax adjusted manner, doing tax loss harvesting, and a glide path for the entire thing. It's essentially a TDF 2.0. 25bps won't change anyone's retirement goals. Oh and it calculates and distributes their withdrawal strategy with almost perfect success. And all they have to do is turn on auto deposits.

Really bad take.

25bps adds up to a TON of money over 30 years

[redspade]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

This is a bad take. 25bps to turn the average joe into a boglehead holding essential VT + BND in one "account" that manages all three tax buckets in a tax efficient manner, calculating if they are on or off track with their retirement goals in an inflation and tax adjusted manner, doing tax loss harvesting, and a glide path for the entire thing. It's essentially a TDF 2.0. 25bps won't change anyone's retirement goals. Oh and it calculates and distributes their withdrawal strategy with almost perfect success. And all they have to do is turn on auto deposits.

Really bad take.

25bps adds up to a TON of money over 30 years

Looking at it in a silo, sure. But it won't change anyone's retirement goals. What I listed above WILL change retirement goals in a positive direction for a lot of people. I would bet the average Betterment user will outperform half this forum by avoiding behavioral mistakes.

[CyclingDuo]

Robo advisors are a rip off. For any tax advantaged account just use a target date fund if you want to go that route.

This is a bad take. 25bps to turn the average joe into a boglehead holding essential VT + BND in one "account" that manages all three tax buckets in a tax efficient manner, calculating if they are on or off track with their retirement goals in an inflation and tax adjusted manner, doing tax loss harvesting, and a glide path for the entire thing. It's essentially a TDF 2.0. 25bps won't change anyone's retirement goals. Oh and it calculates and distributes their withdrawal strategy with almost perfect success. And all they have to do is turn on auto deposits.

Really bad take.

25bps adds up to a TON of money over 30 years

It does eat into your pie, but not sure it equates to a "TON" if the service being provided has value to the investor. 25bps still lands one in the lower level of pies with lower associated administrative wrap fees + expense ratio costs...



It's the top row that we all want to vacate.

CyclingDuo

[gavinsiu]

I feel that Robo Advisors are not necessary an invest and forget sort of investment. A lot of these companies are fintech that need cash. They might get sold to firms that might decide to extra more money. Wealthfront a while back wanted add Risk parity which shifts 20% of portfolio to active management. While you can opt out, I believe it gets switch on unless you opted out. Even larger firms are not immune. Vanguard appears to be wanting to increase PAS fee, or at least have multiple tiers.

Human advisors are also not immune to change. Advisors have their own lives and sometime there are issues. They might get greedy overtime for example. One common change is the fee structure. My mom have had advisors up and one day double the fee because she had a small account. The same thing also applies to robo advisors and funds.

Target funds have also changed overtime. I believe Vanguard Target fund have added international bond and higher international allocation. I am not advocating if this is good or bad, but it may not what you want. My feeling is that with a lot of institution using the fund, thy can't make drastic changes.

BH advocate that we try to stick to the plan and not make too many unnecessary changes, but you still need to be vigilante and know some basics so you don't get prey upon. Robo Advisors can be useful but onlyi if it provides services other than portfolio allocation. You got to read the fineprint, just like everything else.

[pennsylvania211]

For hands off investors, target date funds are an easy and safe choice. Just select your retirement year fund and put in whatever you can, it will do the rest. Current target date funds are cost as little as 0.08%-0.11%.

For hands on investors, there are plenty of simple (or complex) index stock/bond/xx portfolios based on one's risk tolerance. Current index funds cost as little as 0.00%-0.10%.

In vast majority of scenarios, robo advisor costs more for the hands off and the hands on investor, after adjusting for risk taken. Costs more either directly (Vanguard for example charges 0.30% 0.15%) or indirectly when companies play games with you by quietly messing with algorithms to extract hidden costs from you (see Schwab and Wealthfront cases above). In the unlikely scenario that you come out ahead with robo, the net positive difference is so little that it doesn't change your life. If you are suffering from dementia, robo will not protect you from making drastic changes to your life and money.

So for adding another layer of complexity with robo, I don't see a meaningful return. Complexity gets increasingly difficult to monitor and manage as one gets older.

Edit: thank you to bonesly for the post below

[bonesly]

In vast majority of scenarios, robo advisor costs more for the hands off and the hands on investor, after adjusting for risk taken. Costs more either directly (Vanguard for example charges 0.30%) or indirectly ...

Just a minor quibble, Van Digital Advisor is 0.15% and is their robo service. All their other tiers include access to an advisor and are 0.30%, but the robo-only service is half that. Their robo service will execute automated tax-loss harvesting and tax-efficient fund placement.


Source: Vanguard Investment Advice Comparison

[pennsylvania211]

Thank you. Edited.