Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
Competing With Free
The hardest thing most people have with investing is knowing where to start. How do I build a portfolio and what funds should I use? I hazard to guess its the biggest reason more people don’t start sooner.
Technology, in the form of robo-advisors, have popped up to remove this obstacle. All you have to do is set up regular deposits, answer a few questions, and the robo-advisor does the rest.
It’s a simple solution to a big problem.
With technology, simple solutions are easily replicated. There’s nothing proprietary about this. The number of competitors in this space is your proof. And now that proof of concept works, major brokers and fund companies are joining the party.
There’s one problem. Technology has a way of eating itself. Those first movers that charge a fee, now have to compete with a new price point. FREE.
How do these companies compete with free? Look at financial planners for inspiration – added value. Good planners bring more than a portfolio template and risk questionnaire. The differentiator for most is their ability to manage you and your money.
The current robo-advisors do a good job of managing your money. They haven’t been tested on how well they manage you. In their short existence, the market has only gone up. How will it handle a market downturn? I have some doubts. In my experience, software never offered a calming reassurance when everything seemed to go wrong.
Now that the race to zero in this space is finally here, the rest of the big brokers and fund companies will be forced to follow suit. In the next few years, you can expect basic portfolio management, fund recommendations, rebalancing, and tax harvesting offered free with every account.
That might be good for consumers. Not so for the current robo-advisors who lost their only value add. Low cost always matters with investing. And free is a great sales tool.
But in this case, you have to consider more than the fees you might save. What self-inflicted costs could it create? Paying a small fee every year is worth it if it saves you from making a bigger, costly mistake down the road. I’m not sold on whether robo-advisors are the answer.
- Find a Financial Adviser Who Will Put Your Interests First – B. Ritholtz
- What’s An Investor To Do About Bonds? – A Wealth of Common Sense
- Building a Personal Margin of Safety – Abnormal Returns
- The Problem With Low Volatility – Monevator
- Swedroe: The Best Returning Styles – ETF.com
- Strange Financial Advice – M. Housel