September 29, 2023 8:32 pm
September 29, 2023 8:32 pm

Maximizing Growth and Efficiency: Embracing Robo-Advisors for Retirement Accounts

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Five years ago, I moved my retirement account from Betterment to Vanguard because I wanted to take advantage of Vanguard’s low-cost index funds. This decision proved to be great as it set my portfolio up for stronger long-term growth. During this time, I grew my account and built a portfolio of index mutual funds, which provided diversification across sectors and geographies. This diversification is similar to what a robo-advisor might have done for me. By doing this, I saved between 25 and 60 basis points depending on the specific robo-advisor. However, things have changed now. Today, there are companies offering robo-advisors with 0% management fees. This prompted me to reevaluate my investing decisions. What I ultimately discovered is that switching companies can be a smooth and effortless process. Moreover, it saved me either several hundred dollars or several hours of my time every year.

Portfolio adjustments are crucial. Robo-advisors save time.

Maintaining a consistent risk exposure without taking any actions to update a portfolio is practically impossible. Over time, certain industries will experience favorable trends, like the recent AI boom benefiting chipmakers such as Nvidia. On the other hand, some investments may suffer significant losses, as seen with Coinbase during the cryptocurrency bubble burst. These events can cause portfolio allocations to deviate from their original values as the underlying securities change in worth. Fortunately, adjusting allocations through trades involves straightforward calculations, but it does require some time. Let’s say I value my time at $65 per hour, and I spend around an hour each month dedicated to managing my portfolio allocation. In that case, the annual cost adds up to approximately $800. For new investors with investable assets ranging from $50,000 to $300,000, a robo-advisor charging an annual fee of 0.25% would amount to $125 to $750, respectively.

Realizing the potential time savings, I conducted research on the available robo-advisors and discovered that some, including the robo-advisor offered by Charles Schwab, provide fee-free services. Finally, I found a service that convinced even someone like me, a finance enthusiast, to abandon the time I used to spend monitoring my accounts!

Traditional institutions offer surprisingly quick account creation.

Having already gone through the hassle-free process of opening brokerage accounts with Robinhood and Public, I knew that quick and easy account creation was possible. However, I was pleasantly surprised by how swift the account creation process was at traditional institutions like Charles Schwab. The Charles Schwab website claims that you can open an account online in 10 minutes, but based on my personal experience, that estimate seems more fitting for Boomers rather than Gen Z or Millennials. When I created my account, I took my time and still managed to complete the process in just under 3 minutes. While the user interface may not have had the same modern aesthetics as fintech companies, it was practical and effective.

My experience transferring accounts was seamless.

Transferring my old account turned out to be incredibly convenient. Unlike my experience five years ago when I moved my account to Vanguard, this time I didn’t have to go through the hassle of making phone calls or printing any paperwork. The entire process took me approximately 2 minutes, and everything was done through a simple web browser. After submitting the account transfer request, I received a push notification right on my wrist, confirming that the request had successfully passed the submission step and was now being reviewed. This update brought me a sense of reassurance, making me confident that I had entered the account number correctly.

Robo-advisors balance control and automation.

When it comes to retirement accounts, I prefer to stick with stocks and bonds. Alternative assets just seem too risky for my taste when it comes to my retirement savings. While I understand the importance of taking calculated risks for retirement planning, I believe it should be done in a controlled manner. It’s essential to have market exposure, but it should be managed systematically to minimize risk in these asset classes. Rebalancing is the key to achieving this, but I must admit, manually performing this task isn’t particularly enjoyable. That’s why I strongly believe that automation should be implemented to streamline the process.

Additionally, several robo-advisors offer a valuable feature known as tax-loss harvesting, which can enhance investment returns and reduce tax liabilities. Tax-loss harvesting involves strategically selling investments that have experienced losses to offset gains in other investments. By leveraging this automated process, robo-advisors can identify and execute tax-efficient trades that minimize taxes owed. This can lead to significant tax savings over time. Robo-advisors utilize advanced algorithms and technology to monitor and analyze portfolios continuously, identifying opportunities for tax-loss harvesting throughout the year. This systematic approach ensures that investors can maximize their after-tax returns while maintaining their desired asset allocation. With tax-loss harvesting as a built-in feature, robo-advisors provide investors with an efficient and hassle-free way to optimize their investment strategy and potentially boost long-term wealth accumulation.

If you are a fellow finance enthusiast, then perhaps you are still manually rebalancing your passive index portfolios. If so, then you might also be pleasantly surprised with the products available today and how easy it can be to switch to a robo-advisor.

Bottom Line

In 2023, there are several free robo-advisors to choose from, such as the Schwab Intelligent Advisor. Automating portfolio allocation and rebalancing is not only time-saving but also eliminates the tediousness of the task. Although some robo-advisors now offer their services for free, it remains crucial to carefully assess where the robo-advisor will invest your funds. It’s essential to evaluate the fund level fees as well as how well the funds perform relative to their benchmarks to ensure you are making a sound investment decision.

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