For whom would a robo-advisor be a good choice?
There are only a couple of situations where I think that robo-investors (I really call them robo-investors, as they’re not robo-advisors, such as myfinancialanswers.com) are appropriate for a millennial:
You are absolutely, positively, never going to rebalance your portfolio, and you want to put money into something and completely forget about it. I still would rather see someone invest in a low-cost target date fund, such as Vanguard’s target date funds, than see someone pay over the top for a robo-investor.
You have so much money in taxable brokerage accounts that you can take advantage of their tax loss harvesting to lower your taxable income. This is a situation where I’m more of a fan of letting a robo-investor do the work for you.
Conversely, in what scenarios would a robo-advisor not be an appropriate option?
I think for most all millennials, investing in low cost index funds and rebalancing annually, using dollar cost averaging is going to be a much more cost-effective way of saving money for retirement than using a robo-investor. The fees charged by the robo-investors just do not justify the minimal time that is saved. If you set up an automatic contribution each month, then it should take about 15 minutes every year to rebalance. If you don’t even want to do that, then just set up a monthly contribution to a target date fund.
How do robo-advisors compare to human financial advisors?
One benefit that a robo-investor has compared to a human financial advisor is that the robo-investor is not going to be subjected to the same behavioral biases that a human financial advisor is. For example, human financial advisors may be subjected to the Dunning-Kruger effect, where they think that they’re much better at a task (such as investing) than they actually are. Furthermore, robo-investors do not have conflicts of interest. Even if your advisor discloses a conflict of interest, psychologically, it does not help you. However, again, just contributing regularly to your investment and retirement accounts and going for low cost options will get you where you want to go. Instead, use a human financial advisor, or a roboadvisor such as myFinancialAnswers, to answer your financial planning questions and tell you how much and in what different types of accounts (e.g. taxable, Roth IRA, traditional IRA, 401k, etc.) to invest your money.
Jason Hull, CFP(R) is the owner of Dallas, Texas based Hull Financial Planning. He started and sold a software company as well as founding a private equity group. He hit FIRE at age 46.