Author Topic: Robo Advisors - Advisement Fees  (Read 1188 times)

CBnCO

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Robo Advisors - Advisement Fees
« on: January 12, 2018, 08:22:30 PM »
Although I'm inclined to be self directed, I am intrigued by the robo-advisor's ability to do continual rebalancing and auto-tax loss harvesting that in theory can increase returns. That said, I am mostly curious why all advisement services continue to offer their services on a percentage of portfolio value basis?

Legacy full service advisors seem to charge around 1% per year and the new robo-advisor products around .3%; but, why should somebody who has $500k pay 1/3 of the amount of somebody who has $1.5M, especially with the new computer run advisement where there doesn't seem to be any additional work required to manage a portfolio irrespective of its total value? . Is there some rational logic to this method of billing or is it just a leftover from the legacy model?

I would think somebody would just charge a fixed amount per year or month..

Mighty-Dollar

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Re: Robo Advisors - Advisement Fees
« Reply #1 on: January 12, 2018, 11:05:45 PM »
Exactly. Would you pay a contractor three times as much for the same project just because you live in a wealthier neighborhood? No.
It should take the same amount of time to work with client A who is worth 3 million as client B who is worth 1/2 a million.
And really it's a one time consultation to come up with an investing game plan (which is essentially deciding on a bond/stock allocation ratio). After that it's percentage rebalancing if and when the allocation ratio changes significantly. A third grader can rebalance.
If you don't feel comfortable coming up with an allocation ratio on your own then you can hire a fee-only fiduciary on an hourly basis. And by the way that's about how long it should take. One hour. It ain't complicated. Advisors like to make it seem complicated in order to bill you more.

BTW there's free robo advisors. You don't even have to pay .3% per year.
https://www.blackrock.com/wte/core-builder/us?refType=fi
https://personal.vanguard.com/us/funds/tools/recommendation?reset=true
https://gps.ricedelman.com/
« Last Edit: January 17, 2018, 02:33:26 AM by Mighty-Dollar »

Retire-Canada

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Re: Robo Advisors - Advisement Fees
« Reply #2 on: January 12, 2018, 11:11:47 PM »
Although I'm inclined to be self directed...

Just do it. It's simple, easy and low cost.

CBnCO

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Re: Robo Advisors - Advisement Fees
« Reply #3 on: January 13, 2018, 06:46:52 AM »
Although I'm inclined to be self directed...

Just do it. It's simple, easy and low cost.

Was mostly interested in the claims that the computers can do the auto balancing and tax loss harvesting to improve long term returns. No way you could do that manually; but, looks like some of that capability will be available to us for free in the near future anyway.

Retire-Canada

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Re: Robo Advisors - Advisement Fees
« Reply #4 on: January 13, 2018, 07:58:46 AM »
Was mostly interested in the claims that the computers can do the auto balancing and tax loss harvesting to improve long term returns. No way you could do that manually; but, looks like some of that capability will be available to us for free in the near future anyway.

They would have to improve returns so much you actually gained enough to offset the extra fees. 

boarder42

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Re: Robo Advisors - Advisement Fees
« Reply #5 on: January 14, 2018, 04:48:04 AM »
There is no proof they are producing enough benefit with tax lost harvesting. And other methods to be worth more than their cost.

Indexer

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Re: Robo Advisors - Advisement Fees
« Reply #6 on: January 14, 2018, 07:23:50 AM »
There is no proof they are producing enough benefit with tax lost harvesting. And other methods to be worth more than their cost.

This^^^

If you read the fine print on Betterment's website they are grossly exaggerating the value of TLH. Their models showing TLH could improve your returns by X% assume that you never sell the holdings. When you harvest a loss you also harvest your own cost basis, which means when you sell the holding in the future you will have more capital gains. With TLH you are trading a loss today for a bigger gain in the future. It is beneficial because of the time value of money, the tax deductability of that loss today(if reinvested) is worth more than the extra taxes on the gain in the future. Betterment's models assume you never pay the taxes on that gain.

TLH also becomes less and less useful over time. Only recent contributions will benefit from it. Money you invested 5-10 years ago is likely to remain positive even in a correction. Over time you are benefiting less and less from TLH, but always paying them the same fee.

IMO robo advisors are just rebalancing tools and they charge WAY too much for that service.

GGNoob

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Re: Robo Advisors - Advisement Fees
« Reply #7 on: January 14, 2018, 11:41:15 AM »
Ideally, you treat all of your accounts as a single portfolio and hold the funds where they are most tax efficient or where you have a lower expense ratio. Then you build yourself a spreadsheet or find one online to help you rebalance as needed.

If that doesn't work, M1 Finance could work as a great, free option for IRAs and taxable accounts. Not really an advisor, but if you pick your allocation it'll help maintain that for you. Then you just have to worry about your 401k.

Frugancial Advisor

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Re: Robo Advisors - Advisement Fees
« Reply #8 on: January 14, 2018, 12:13:30 PM »
Robo Advisors = Let's attract the millennial demographic by exposing the overcompensated financial advisory industry via technologically based solutions and then market ourselves as better than individual investing due to our advanced 'tax-loss harvesting' and 'rebalancing' mechanisms.

No.

Robo-Advisors are a waste of money. You could literally invest your money in a Vanguard ETF and hire a grade 9 math student to go in once a year and rebalance/crystallize gains for a $100 gift card to Gamestop and you would be far better off than having some sleek looking website take a MASSIVE cut of your portfolio. Oh, and let's not mention that during Brexit one very popular Robo Advisor service halted all trading and couldn't handle the volume.

Do it yourself. Hire a fee-only hourly based CFP to take care of anything out of your realm of comfortability and you will be much wealthier.