Well people, the future of investing is here.
And I suppose that it shouldn’t be that much of a surprise that it comes in the form
of computer algorithms.
After all, we have algorithms controlling essentially everything we see and computers
starting to handle the cars that take us everywhere we go, so why not have that same technology
handle our investing?
Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about
Investing, debt, retirement, and many other general financial education videos because
the school's aren't going to do it for us.
So if any of those topics sound interesting to you or if you want to learn how to better
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So as you can probably already tell today we are going to be talking about Robo-Advisors
or Robo-Investing.
I’m going to be discussing what Robo-Advisors are as well as giving some of my own personal
thoughts about the potential advantages or disadvantages of using them.
And I want to stress the word potential!
Because I’m going to be honest with you, as of the making of this video I have been
unable to find much solid evidence one way or the other, mainly because of how relatively
new this phenomenon is to the investing world.
And I was initially going to wait until we had a lot of good studies done on the subject
that I could reference, but given how new Robo-Advisors are and how so few of my concerns
actually revolved around purely numbers I thought it would be better to just do this
video now and get everyone else’s thoughts on the matter, because it could be years before
we have a good amount of solidly conducted studies that give us a consensus on the matter.
So long story short, this video is going to be a little different than most of my other
videos because I’m not here to tell you definitively whether I think that these services
are good or bad.
I don’t have much experience with them so I don’t really know.
Though I know for a fact that some of you watching this video do have a decent amount
of experience with these apps so I encourage you to leave your thoughts on them in the
comments below, because it will help me and everyone else watching this video to get a
better picture of the real advantages and disadvantages that people are experiencing
when using these apps.
Let’s get started.
For the sake of keeping this video from becoming too long, I’m going to just stick to using
the app called Acorns as an example, though it is by no means the only Robo-Investing
app out there.
So real quick, what are robo-advisors?
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning
services with little to no human supervision.
A typical robo-advisor collects information from clients about their financial situation
and future goals through an online survey, and then uses the data to offer advice and/or
automatically invest client assets.
Now I was asked on an earlier video where Robo-Investors like Acorns fall in terms of
active or passive investing.
The apps themselves are not passive or active persay (regardless of whether they charge
a percentage fee of the balance of your account or the $1 monthly fee), however, based on
what I could find while researching acorns it appears as if they have (or at least had,
again I don't use it so I can't confirm what options are there today) various index, or
passive, investing options when looking at stocks (they appeared to be in the form of
ETFs or Exchange Traded Funds and were mostly offered by Vanguard).
Some examples that I found were options to track the S&P 500 (ticker symbol: VOO if you
want to look it up for yourself), Vanguard's Small Cap ETF Index Fund (ticker symbol: VB),
Vanguard's Emerging Markets ETF Index Fund (ticker symbol: VWO), and Vanguard's REIT
ETF Index Fund (ticker symbol: VNQ).
However (assuming the info I found while researching is correct anyways), acorns charges 0.25%
of the balance of your account as long as it is under $5,000 and $1 per month for accounts
over $5,000.
Which doesn’t sound all that bad, and in comparison to a lot of mutual funds and several
human advisors it probably isn’t.
But there is one thing that I think should be considered if you decide to look into Robo-Advisors
further and that is the expense ratios of the funds that you are actually buying in
the app itself.
The expense ratios (or the percentage you would be charged on your balance, similar
to how acorns manages accounts under $5,000) of the funds that people would be investing
in are as follows:
Vanguard S&P 500 Index (VOO): 0.04%
Vanguard Small Cap ETF (VB): 0.05%
Vanguard Emerging Markets ETF Index Fund: 0.14%
Vanguard REIT ETF Index Fund: 0.12%
All four of them have lower expenses than what acorns is charging investors (which makes
sense from their perspective, I mean acorns has to make money somehow).
But, based on the S&P 500 Index's expense ratio, you would have to invest $30,000 invested
before you start paying $1 a month (or $12 a year) in management expenses.
And that’s probably going to take a while to work your way up to if you’re investing
the rounded up amounts of your purchases.
So as far as long-term straight buy and hold strategies, there probably are better options
out there.
But when trading ETFs you may have to pay a transaction fee (it varies depending on
where you go obviously) which depending on how frequently you buy and/or sell your investments
may quickly make up the differences in expenses... on the surface anyway.
This brings me to my perspective...
I have no proof of this (as I said these robo-investors are fairly new, so there isn't a whole lot
of scientific data to back up what I'm about to say, so take what you will from it and
for those of you who have experience with these apps, let me know if I’m just off
base here), but I wonder how much of a difference using a robo-investor would actually make
on your spending patterns/habits.
I wonder this because it is essentially rewarding you and making you feel good for making those
micro investments (which as far as I can tell usually occur when you have made a purchase
with your credit or debit card because it rounds up the purchase and puts the spare
change into your investments).
From an emotional and/or psychological perspective...
will it make it easier for people to make those small, but frequent impulse buys (like
a pack of gum while waiting in line at the grocery store or a latte on the way to work)
because they feel that with every purchase they are getting closer to their dream retirement?
(which, I mean, technically they are.
But it's micro investing.
And micro investing is likely going to return micro results.
I certainly don't want a micro net worth when I get ready to retire.)
In some of my other videos on this channel, I've shown how much of a difference even $5
or $10 a day can make in your financial goals over time.
I just fear that using these robo-investors may (again I don't have any scientific evidence
to back it up so I could be totally wrong) make it even more difficult for people to
get (and stay) in control of their finances, because with these apps, spending money becomes
the normal way to save for retirement.
I apologize for the length of this rant, I guess.
More thoughts just kept occurring to me as I researched and I wanted to get them all
out there, whether they’re right or wrong.
So I hope I didn't come off as too preachy that wasn’t my intent at all.
I just wanted to get this conversation started.
And I encourage everyone watching this video who have some experience with Robo-Advisors
to leave their thoughts down in the comments section below.
Because again I have no data to back up these concerns so I may be way off base with my
concerns here (and I really hope that I am).
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
and hit that Bell next to my name so that you'll be notified of all my future uploads.
I generally upload every single Friday, and if you have a friend that would be interested
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out there and start our own Financial revolution.