By Sheryl Rowling
SAN DIEGO — Question: What are robo-advisors? Should I be using one for my investments?
Answer: Before answering whether or not you should use one for investing, let’s look at what robo-advisors are. These on-line investment solutions (robo-advisors) seem to be popping up everywhere. In general, robo-advisors, such as Betterment, WealthFront, Schwab and Vanguard, provide investors with any size portfolio the opportunity for convenient, low-cost and (somewhat) tax efficient investment management.
Robo investing, although easy, is not the same thing as comprehensive wealth advisory services. If you’re those looking for more than just “multiple choice” investing, there’s not a substitute for a good financial advisor. Here’s what robo-advisors can’t do:
- Develop a customized financial plan addressing not only your investments but also cash flow, detailed retirement planning, insurance needs, college funding, estate planning and tax planning. Developing an appropriate investment plan is best achieved when looking at the entire situation, not just a quick risk profile survey.
- Save on taxes by investing on the “household” level. Investing account-by-account makes it easy to track, but it ignores perhaps the largest tax-savings opportunity: location optimization. By managing all of your accounts as one portfolio, your advisor can place less tax efficient investments into the IRA and hold more tax efficient investments in the taxable account. That way, for example, taxes aren’t immediately payable on bond interest held in your IRA and appreciating stocks held in the taxable account will ultimately be subject to capital gains rates (about half of the cost of ordinary tax rates if held in the IRA).
- Be there for advice and conversations on a personal level. Your personal financial advisor can answer questions like “What happens if I sell my house this year?” or “Should I buy or lease my new car?” When the market is going crazy, your personal financial advisor can offer reassurance and relate impacts to your particular situation.
- Help you achieve all of your goals – not just investment goals!
Working with an advisor that is more of a “one-stop-shop” can also provide integrated services such as tax planning and tax return preparation.
There is a value to advice over and above the built-in costs of investing. It’s a choice that each investor can make based on specific needs and wants. I, personally, use the services of an attorney to prepare estate documents rather than filling out downloaded forms from the internet. I might also go for a hybrid approach – looking up my symptoms on the internet, but still going to a doctor. For me, personal interaction with a trusted professional is essential.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com. Comments intended for publication in the space below must be accompanied by the letter writer’s first and last name and by his/ her city and state of residence (city and country for those outside the U.S.)