What Is A Robo Advisor?

In Wednesday’s Juice, we asked Has Generation Z Given Up On Retirement:

This isn’t the stupid latte effect the most annoying money gurus blabber on and on about. While, yeah, it might be nice to invest $5 a day rather than spend it on coffee, it’s not making or breaking the financial futures of people with enough money to see Taylor Swift, travel overseas or wear Christian Louboutin. 

It’s the big splurges and fixed expenses that count, such as seeing Taylor Swift, traveling overseas or wearing Christian Louboutin. And paying $3,000 a month for a luxury apartment in a major city or metro area. Or dropping $1,000 a month on a “nice” car. 

We get why Gen Z might be prone to doom spending. We understand that they’re upset about not being able to buy a home and the overall high cost of living in America. But it’s no reason to ignore the reality that we all need to plan for the future, regardless of age. 

For as many Gen Zers and young millennials doom spending and not saving for retirement, there are older millennials, Gen Xers and even baby boomers super behind on retirement savings or running out of cash in retirement. This crisis is universal, impacting all different types of people across the lifespan. 

But here’s the thing — if you still have at least a little bit of time on your side, investing for anything, including retirement, has never been easier. 

One of the things we’ll do when we discuss retirement throughout 2024 is cover the logistics around how to do it. 

In light of Gen Z’s apparent spending habits — and how painfully easy it is to hold at least $500 to $1,000 back when you make good money, but spend recklessly — let’s look at robo advisors. 

We’re not sure why the FinTech industry, who basically got the ball rolling on this, decided on robo advisor. It’s a slightly creepy name that doesn’t breed a ton of confidence. They should have just gone with what a lot of their marketing uses anyway  — automated investing. 

Betterment, one of the robo-advisory pioneers, uses this term to define their service. And we think it can work for any type of investor, but especially two seemingly different groups:

• Investors with minimal knowledge and not enough time. 
• Investors with above average to even extensive knowledge, who understand how tech can power investing and not enough time. 

Or maybe you have time, but just want to turn over investing to professionals. Or use automated investing in addition to your other investing. 

This is how services such as Betterment work: You sign up. They ask you a series of questions about your financial situation, goals, investment knowledge and aversion to risk. Then, they suggest a diversified portfolio of ETFs you can regularly send money to. 

The fees tend to be low. Betterment charges $4 a month or 0.25% annually. Betterment also provides access to human financial advisors with a $100,000 minimum balance and a 0.40% fee for help putting together a more comprehensive financial plan. Some robo-advisors, particularly SoFi, offer access to a human for free. 

These services regularly look at your holdings and rebalance as your positions fluctuate in value to keep everything on track and in line with your goals. Most robo advisors also include tax-loss harvesting, which The Juice defined and detailed the other day: 

You want to hold Apple and Tesla, but you can’t resist taking profits on Nvidia. So you sell NVDA and realize the $2,431 short-term capital gain. You’re not a fan of taking the tax hit, particularly at your income tax rate, so you decide to employ tax loss harvesting to help offset this taxable gain. 

Here’s how it works. 

You could sell one or more of your losers and use the capital losses to offset up to $3,000 of your ordinary taxable income. If you sold both AMC and CGC, you realize a capital loss of $1,551. You would be able to subtract that amount from your NVDA sale and only pay income tax (short-term capital gains tax) on $880 of your NVDA profits. 

If you exceed $3,000, you can carry over the excess amounts to offset income in future years.

Old school firms, such as Charles Schwab, also have gotten into automatic investing. What we like about the services from the big boys — Schwab, Vanguard and Fidelity — is that they put you in their low-cost ETFs, pretty much across the board. While newer Fintech firms also get you into these big ETFs, some use funds with higher expense ratios. And those no need to pay a high expense ratio on an ETF. 

That said, if we had to pick a FinTech firm, we’d go with Betterment first, SoFi second. The cool thing about these companies is that you can handle much, if not all of your personal finance with them. Betterment does regular investing, checking, savings, crypto. SoFi even does loans, insurance and credit cards. 

For the big boys, we’d go with Schwab, particularly because we love their onboarding process. It’s thorough and extensive. And, unlike many other robo advisors, Schwab’s automated investing service gives you a clear idea of where you’ll be invested before you sign up.  Of course, you can do other investing with Schwab and even get a checking account there with a debit card that doesn’t charge international transaction fees. (How’s that for a pro tip!?). 

The Bottom Line: Robo advisory, or automated investing, isn’t just some cool high-tech fad in the age of AI. The Juice thinks it’s here to stay. And one reason is because of the angst, particularly among Gen Z, we have discussed this week. 

Increasingly, people feel like the money-related parts of life are impossible. We empathize. But the answer isn’t to give up, especially on long-term planning. Especially when you have so many free (like The Juice!) and low-cost tools at your disposal to put investing and the rest of your personal finance in good hands and on autopilot.

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