What is a Robo-Advisor?

A robo-advisor is an online service that manages your assets directly or indirectly at a lower fee than is available from typical advisors.  They are the market place's response to high fees, available technology, and the fact that today we are responsible for our own retirement.

With the advent of the 401(k) and the consequent demise of pension funds, individuals have had to take on the task of managing their assets. As a result, an industry arose that charges upwards of 1% to put you into mutual funds charging in excess of 1% and even garnering commissions in many cases on top of that.  They will do this in your 401(k)s and then in your IRA rolled over from your 401(k).  Sadly, the bottom line has been, not surprisingly, poor.  After fees, research has long shown that 8 out of 10 professional managers underperform the market over longer periods.  This is part of the reason that a retirement crisis looms.

Robo-advisors, on the other hand, advise for a low fee so that picking funds, rebalancing, and withdrawing appropriately are broken down in easy-to-follow steps.  IMHO, this still isn't the best approach.  That would be to teach these fundamental principles of low-cost, well-diversified asset allocation based investing in public schools.  Today, instead, if school systems teach anything about investing it is via stock market games which, in turn, is a step in the wrong direction.  Still, for many people today, a robo-advisor could be a good approach.

Don't get me wrong - if you think you are Warren Buffett and want to take the risk of investing in individual stocks for higher performance ,be my guest:  in fact, I actively promote it for some clients with up to 10% of their assets.  FOR MOST PEOPLE, THOUGH, JUST INVESTING AUTOMATICALLY (VIA A 401(K) OR SIMILAR VEHICLE) WILL PUT THEM ON AN INVESTMENT PATH THAT WILL LEAD TO A SECURE RETIREMENT.

I have to say that I am always a bit leery of people who come to the party late.  In that vein, I am looking with a jaundiced eye at the movement in the Financial Planning industry to lower investment management fees in response to the robo-advisor trend.  It is reminiscent of brokers lowering the fees on mutual funds in response to the low fees of exchange traded funds.

In any event, here is the best article I have seen on robo-advisors and the services they offer:

"Financial Advice for People Who Aren't Rich" by Ron Lieber, New York Times

Towards the end of the article, you'll find a useful table comparing the various services. 

Does Your 401k Offer Low Cost Index Funds?

DIY Investor recently looked at the offerings for his youngest daughter's 401k and shared his thinking on fund choices and asset allocation. The critical factor in this whole process, when it got to the actual fund-picking point, was fund expense. Over and above everything else, over the long term, fund expense influences bottom line performance. Simply put, choosing lower expense funds can mean big bucks over the long term. As it turns out, the lowest expense funds are typically index funds because, simply, you are not hiring managers to make buy/sell decisions and do a lot of research. In the case of my daughter's 401k, Fidelity's Spartan Funds fit the bill.

What should the reader get out of all of this? First, pay attention to the benefits package when considering a job. Immediate pay  may not be the most important consideration. This is lost sometimes on young people, and  they literally pay a huge price later. Secondly, if you are in a job and appropriate 401k choices are not offered, talk to Human Resources and see if you can get changes. Very simply, you should be offered at least 3 low-cost index funds for the following market segments: overall stock market, international stocks, U.S. bond market.

Some really good background on all of this is provided by Ron Lieber of the New York Times in "Why 401 (k)'s Should Offer Index Funds."  According to Lieber, only 37% of 401ks offer all three of the index funds mentioned. Also, understand that the fund administrators at your company are fiduciaries. ERISA explicitly states that they are legally bound to take into account plan expenses in selecting investment options.

Start at Community College or 4 Year School?

Ron Lieber of the New York Times has written an excellent column on this question: "Bargains on the First 4 Semesters."

Given the dollar amounts involved, the financial planning considerations are important. The parent's retirement plans can be affected by the choice of college along with the student's loan burden.

The article contains excellent recommendations along the lines of checking out the community college, talking to advisors, not taking courses that are too specific at the community college, finding out how many transfer students actually graduate from a 4-year college, etc. To me, anyone who would follow these recommendations is a serious student and would have no problem going the community college route. The worry for many people is the academic environment. I have taught at both the community college level and a 4-year major college. The academic environments are different.

The community college I teach at is nationally recognized as an excellent institution. It has outstanding honors programs from which the transfer rate is exceptionally high and for which the 4-year graduation rate is high. To me what is  lacking, compared to a 4-year university, is the opportunity to join a hard-partying fraternity or sorority and big-time college sports. The education in the honors programs at the community college can be, I believe, superior to the university for the first 2 years, when individualized attention is considered.

Away from the honors courses, community college is a bit different; and the student who desires to successfully transfer to a 4-year school needs to be highly motivated. The non-honors courses are populated by students who decided at the last minute to attend community college (maybe because they couldn't get a job), didn't take a college level track in high school, have no idea of a career path, and very likely are taking remedial math and English courses.

At the university, it is different. Students have prepared for college in high school, have gone through a rigorous process to get accepted, and many have the necessary math and English skills.A higher percentage of the students know why they are there.

One advantage I believe that the community college offers is that the instructors tend to have real-world experience. Many of the instructors are adjuncts who are practicing law, accounting, economics, or nursing in the real world and can provide excellent advice on career paths.

I, for one, felt I was better prepared entering the university 3-credit-hours-short of junior status with an AA degree from community college.