Power to Robo-Advisors

The word is that Robo-Advisors are good for your financial health. Why? Because they offer similar services as the human kind of financial advisor at lower cost. If you’re paying less in management fees, your returns are higher, your portfolio fatter. That’s the dominant sales pitch. And with the nascent industry growing from $16 billion (USD) under management in 2014 to more than $160 billion today, there’s reason to stop and look at what a Robo-Advisor may do for you.

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Financial Giants Muscling Into The Game

As retail investors flock to Robo-Advisors (i.e., software programs using mathematical algorithms to generate investment advice and manage your portfolio), pioneers like Wealthfront and Betterment must now compete against big boys such as Charles Schwab, TD Ameritrade, Vanguard Group, and Fidelity Investments.

And the bandwagon keeps growing. Bank of America activated Merrill Edge Guided Investing earlier this year, Morgan Stanley announced that they’ll be launching Morgan Stanley Access Investing in the fall, 2017, and Goldman Sachs is gearing up to introduce its own Robo-Advisory services.

In Canada, several independent firms (i.e., WealthSimple, QuestTrade Portfolio IQ) offer Robo-advisory services with Bank of Montreal being the only bank having a firm foothold. With momentum and money on the side of robots, it would be surprising if Canada’s other big banks didn’t roll out their own Robo-Advisor in the next year to secure their slice of this particular money pie.

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How Does It Work, This Robo-Advisor Thing?

Robo-advisors are a third option for investing; doing it your self and full service financial advisory services being the other two options.

Robo-advisors are convenient (24/7 online access) and more accessible and affordable than hiring a financial advisor (you often need a minimum of $100,000-$250,000 to retain the services of a financial advisor; as for Robo-advisors, some do not require a minimum balance to open an account, others are as low as $500).

Depending on the specific Robo-advisor, they offer different degrees of automation: fully automated or a hybrid set up offering access to old fashioned humans for an additional fee.

Either way, getting started involves you answering some questions about your age, assets, financial goals, risk tolerance, investing time horizon, etc. Moments later, computer algorithms propose a cookie cutter portfolio most suitable to you.

Available investments typically include a range of exchange traded index funds. The software continually monitors your portfolio and periodically buys and sells to maintain your stated risk tolerance and financial goals.

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Hype or Substance?

Despite impressive growth of Robo-Advisors in a relatively short period of time, $160 billion is no more than a few drops in a financial industry bucket worth somewhere around $20 Trillion. Still, this niche is expected to continue growing thus more players entering the market.

So … should you bite?

That depends.

  • If you have less than, say, $100,000 for investing, and you want some guidance, then definitely give it a go.
  • If you prefer interfacing with computers rather than humans, again, Robo-Advisors are for you.
  • If you’re currently working with a financial advisor and are not entirely satisfied with the value they bring to the table, then consider opening a Robo-Advisor account to see if it better suits your needs (this may include intangibles other than fees such as guiding you on debt reduction issues, divorce, house purchase, loans, estate planning, and any other financial issues not directly related to investing).

Well, what if your advisor places you in passive funds? They’re still charging you 1 or 2 points. Why pay high fees when an effective Robo-advisor portfolio may be built for less than half the cost?

  • Back to value, let’s give a little more space to fees.

Depending on your robot of choice, we’re talking management fees in the neighborhood of 0.25 – 0.50% for a Robo-Advisor.

Compare this to financial advisors of the human variety who typically charge between 1.0 – 2.0%.

Seems like a small difference in fees? It’s not. Fees matter.

Consider a simple example: your portfolio is worth $500,000. Fees are 2%. Total fees for the year equals $10,000. For simple illustration purposes, if your portfolio remains at $500,000 for 30 years, that’s $300,000 in fees paid. Compare that to 0.5% fees that results in annual fees of $2,500. After 30 years, the final tally is $75,000. Either way, that’s a whole lot of dough toward fees but the 75k is much more palatable than 300k.

Of course, you could slash fees even more by avoiding both humans and robots. Instead, open a discount brokerage account, buy exchange traded index funds, and pay the $5-$10 transaction cost for each buy and sell.

But … what if you’re not the do-it-yourself type when it comes to investments? What if you don’t have the time, knowledge or inclination to manage your investments solo?

Well, then a Robo-advisor would be your next best choice.

 

 

 

 

 

 

Millennials Money Mistakes

Mistakes. We all make them. To err is human … and all that jazz. And when your perspective includes understanding that ‘mistakes’ are not failure by any means, rather an opportunity to learn, then you dust your self off, pick your self up, and continue tweaking your approach until desired results are achieved.

Just ask Confucius, who said that, ‘our greatest glory is not in never failing but in rising every time we fail.’

More contemporary example? How about Michael Jordan, the phenomenal basketball magician: ‘I’ve missed more than 9000 shots in my career.
I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.’


Learning To Crawl

As they continue to shape our world, Millennials (folks who arrived on this planet sometime in the 1980s and 1990s) are manufacturing their fair share of mistakes, no different than past generations.

Consider my Twenty-Something Nieces: independent, ambitious, career oriented, single (with doe eyed beau in tow), no kids, no car, renting, socking away some earnings into savings, and tackling whatever life throws their way. Except personal finances. In this category, they’re somewhat at sea. Not that it will make The Nieces feel any better, but there’s a whole lot of other Millennials who are also scrounging around to find solid financial ground.


Don’ts and Do’s For TwentySomethings

I’m not pointing my finger or tsk tsk-ing the Millennial crowd for their general lack of financial savvy. There’s a learning curve for whatever we do in life. But I am saying, hey, it’s helpful to take stock, assess the current state of your finances, and consider how to improve.

For starters, there are some basic actions you can take to boost your balances for today and tomorrow. These actions (listed below) will not only make you ‘feel’ more financially stable, but will actually improve your net worth.


  1. Budgets Are SO Boring!

A budget is a roadmap, a guide, a friendly reminder as to what you may afford. Without a budget, spending is less disciplined and debt is more likely.

Sure, drafting a budget is not uno numero on your list of things to do on a sunny Saturday afternoon. Or any day for that matter. But I’m guessing that having a positive balance, and growing net worth, ranks high on the list of life goals. If yes, then set aside next Saturday for the boring task of budget drafting.

  1. Blind Eye To Debt

You carry debt. Okay, fine. Now, what are you going to do about it?

Whatever you do, don’t make believe that the debt does not exist. I bring this up because there are some folks who abstain from reality, choosing instead to live under clouds of illusion. Debt can be a tough issue to manage. I get it. But avoiding the issue only makes your situation worse and lessens the likelihood that you’ll achieve good financial health.

Figuring out a plan to pay off your debt, that’s what is necessary. Include this plan in your budget (oh, look, the budget is already coming in handy), and determine the monthly amount to be paid toward debt reduction. Sure, the faster you can pay down debt the better. But even if you’re paying a only small amount each month, that’s something. It’s building constructive financial habits. And as long as you keep on chipping away at debt, eventually it does disappear and you won’t regret it. No one regrets paying off debt.

  1. Sneaky Plastic

Airline Miles! $500 Cash Back! Free Hotel Night!

Financial institutions trip over themselves to offer an array of enticing credit card inducements. Why? Because they earn outrageous sums of money from interest charges.

As for you, the consumer, fact is that unless you pay the balance owing by the due date, you’ll be accumulating debt. Fast. And making financial institutions richer.

Plastic makes it too easy to give in to temptation, to buy something because you WANT it NOW. Financial institutions know this, they employ experts advising on human behaviour. And they know that there are millions of folks who have a terrible time trying to exercise self-discipline. And these folks buy STUFF they can’t afford, and they rationalize that they’ll be able to pay off the purchase before the bill arrives, and they get the bill and stick their head in the sand by making the minimum payment of ten dollars or so each month, and then incurring exorbitant interest charges.

Oy! Under NO circumstances is credit card debt a smart play.

Am I going too heavy on the chicken little act? I don’t think so. This is an issue that only seems to get bigger and bigger. Credit card debt, debt of any kind, can be a hefty psychological burden. Of course, financial too. And given enough time with too few payments, it bankrupts people.

So unless it’s absolutely essential to use plastic AND you know the full balance may be paid by due date, avoid credit cards. Instead, use a bank debit card, or a Visa / Mastercard debit card. This way, you spend only what you have since payment is debited directly from your bank account. And for you old-fashioned types, last time I checked, there’s no chance of going into debt when you pay with cash.

  1. Dormant Dough

THE NIECES, they’re accumulating savings but they’re either not investing or investing wayyyyy too conservatively. This is a problem. And this absence of risk tolerance is unique to this generation. Some researchers posit that it’s related to the deep recession of 2007-2009, and the resulting stock market meltdown.

Whatever the reason, Millennials would be wise to loosen up. I’m not saying to roll the dice on high-risk investments. But I am saying that the 0.25% savings rate offered by your local bank isn’t going to contribute much, if any, to your financial independence.

And you would be wise to consider the stock market. Yes, it’s a volatile venue. But volatility doesn’t necessarily mean you’re walking on the wild side of risk. Especially if you’re a BuddhaMoney wise investor who doesn’t pay much attention to daily financial news headlines. Instead, focus is on the long term (5+ years), knowing that stock market returns historically beat other asset classes.

Consider that, during the past 40 years, the S&P 500 index has averaged total returns (capital gains and dividends) of close to ten per cent. Let’s say the index returns about the same for the next forty years. If so, and you invest $100 / month, in forty years your account will be worth close to $600,000.

How do you get that $100 / month? You plan for it in your Budget (see, it’s a handy little document). It doesn’t matter if it’s $25, $50, $100, or $1,000 investment account contribution. Every dollar adds up. And the thirty-something YOU, the forty-something YOU, etc, will thank twenty-something YOU for being so wise and planning for your future.

For those who do not have the time or inclination to operate a discount broker investment account, find yourself a Robo-Advisor or skilled financial advisor (not all financial advisors are cut from the same pin-striped cloth) to help manage your investments. And definitely place a healthy portion of your investment dollars in equity based Index funds, such as the Vanguard 500 Index Investor for US investors, and the Blackrock S&P/TSX 60 Index for Canadian investors.

  1. High On Spending

In your 20s, you’re likely to start earning real money. And maybe you’re salivating at all the STUFF you can buy knowing it’s within reach: a new car, luxury condo, designer clothes. Right. But within reach doesn’t mean you may afford to buy the luxury condo.

Rather, it likely means you’re the lucky winner of a whopper of a mortgage, get to stress over making monthly payments, and go light on furniture because daily spending is tight now that housing costs eat up more than half your take home pay. Sure, you want a materially comfortable home like your parents. But you’re forgetting that your parents likely worked five, ten or twenty years before being able to afford all the cozy extras.

So for all you Impulsive Izzys, slow it down. Bring Patience into the mix. Only buy what you can afford without taking on unmanageable debt. And when you get that raise at work, this doesn’t mean you should go all ga ga and run out and buy more STUFF, or more expensive STUFF.

Instead, it means it’s time to review your Budget, allocate more money to debt reduction and investing, and then determine how best to spend discretionary funds. This is a Balanced approach to finances, one that reduces debt, increases net worth, and lets the shine sun on your financial health.


 

unknownEnter Buddha

A jug is filled with water drop by drop. There is no other way.