Are Robo Advisors Right For Your Retirement Savings?

Robo Advisors for retirement savingsThis article was sponsored by ModernAdvisor.

Canadians don’t save enough money to comfortably retire on.

More and more Canadians are choosing to work into their golden years with most claiming they want to stay active. While I’m sure that is true for many, there are definitely others that simply can’t afford to retire in comfort.

Generation X and Millennials can no longer rely on holding down lifetime jobs with full pensions. Honestly, even counting on a decent retirement savings matching program from their employer is often too much to hope for.

Like it or not, we’re being forced into competently managing our own retirement savings without much help. Even people with an aptitude for money like myself are prone to making costly investment mistakes.

Going for generic advice from your bank can be even worse, often locking you into funds with enormous fees that erode your retirement savings right under your nose. Bank needs to “make bank” after all - have you seen their profits?

Robo Advisors, like ModernAdvisor - the lowest cost Canadian online advisor, provide another option that could be the right one to help make your ideal retirement a reality.

Robo Advisors vs. Mutual Funds

Robo Advisors (about 0.7% in fees annually) are cheap compared to mutual funds (about 2.3%).

Mutual funds aren’t all bad though, they can actually be the right choice ... sometimes.

To get real value from a mutual fund you need an “actively managed” fund with a really smart fund manager that actually actively manages the fund. That means they buy and sell the underlying investments regularly. If they’re doing little more than track an index - you shouldn’t be paying them so much to do pretty much nothing.

The rub?

Picking a good fund manager is about as easy as picking a good individual stock. Most of them underperform the index or other comparable benchmarks after their fees are deducted. And, like individual stocks, past performance is often a poor indicator of future success.

If 2008 has taught us one thing, it’s that letting random greedy investment bankers be in full control of our money and economy is definitely a bad idea.

No one cares about your money like you do. If you’re not the one making the calls, you need to know who is. And be 100% sure you trust their capabilities.

Robo Advisors are less likely to mismanage your money because they follow a well-researched and proven low cost index investing strategy. Buy and sell calls are based on an algorithm, not emotional decision-making that eats away at your returns.

Robo Advisor vs. DIY ETF Index Investing

0.7% in fees for a Robo Advisor seems reasonable - but they still typically cost more than DIY investing through exchange traded funds (ETFs). Those cost as little as 0.2% if you choose ETFs with low MERs and minimize your transaction costs.

You’ll find many avid DIY investors with the “curse of knowledge” who have spent hundreds of hours researching investing say that everyone should go DIY. After all, on a $100,000 portfolio you are “throwing away” that 0.5% ($500) each and every year. As your portfolio grows and the years pass, that $500 compounds to a much bigger number.

What these fine folks fail to see is that Robo Advisors make investing in low cost well-diversified investments dead simple. Time and time again it is proven that busy, uneducated, or uninterested people NEED simple.

If someone well read on investing like myself can make mistakes with DIY investing, then those odds only increase for people who have little to no interest in it.

Even if they choose the right investments every time, avoid the temptation to sell during market crashes, and rebalance their portfolio religiously … there’s still transaction fees and neglecting to contribute or invest regularly that can creep in.

Do you think all those pitfalls add up to a loss of more than 0.5%? I do … at least in many cases.

Robo Advisors make avoiding all the above problems much easier.

Robo Advisors vs. Individual Stocks

If you’re thinking about picking that next hot stock, you might as well throw darts at your computer monitor and pick your stocks that way.

You’ll constantly hear people talk about their winners in the stock market, but they rarely talk about the thousands of dollars in losses they are embarrassed about.

What makes a winner anyway? Your coworker may be proudly boasting about their great returns on Stock X, but they probably aren’t factoring in how much better they did compared to the overall markets or other relevant benchmarks. That wouldn’t be as rosy of a picture now would it?

Even if you follow a disciplined individual stock investing approach like value investing or dividend investing, you’re still at a major risk of picking losers and underperforming the markets. Proper diversification across companies, sectors, and geographical regions becomes much more difficult.

Although you won’t pay any management fees at all with this approach, your trading fees will skyrocket especially with smaller portfolios.

The way I look at it is if the 24/7 professional investors often get it wrong, what chance does the full-time employed parent have?

When They’re The Wrong Choice

Robo Advisors can also be the wrong choice, or at least not the complete choice if:

  • You need a complete financial or retirement plan - they only come with light financial advice.
  • You have a retirement matching plan at work that forces you to invest with a specific company.
  • You have highly specialized investment needs and need to fine tune your portfolio for a specific reason.
  • You are uncomfortable conducting your personal business online.

Most of these problems can be worked around, like by hiring an unbiased fee-only financial planner to do your financial and retirement plan. You’ll probably get a much better plan that way anyway.

ModernAdvisor even offers Custom Portfolios if you invest over $150,000 and you need to tinker with your asset allocation. This can happen when you have investments and other assets spread across multiple financial institutions, businesses, real estate holdings and you need to account for all of that.

So, Are “Robos” Good For Retirement Savings?

Only you can say for sure what’s right for you.

Robos do offer a compelling mix of simplicity, low fees, light advice, retirement account options, and some protection from your biggest investing obstacle - you.

ModernAdvisor has given HTS readers an exclusive offer to manage up to $50,000 of your money free for one year. In addition, they will pay up to $200 in transfer costs that your existing investment company may charge for doing the move. Just enter code HTSFREEYEAR50 (expires March 1, 2017) when creating your account.

If you’d like to experiment a bit first, you can also try ModernAdvisor free for 30 days right here by investing $1,000 of their money (and keep the profits).

But, if you’re already confident you’re on the right track, then there’s nothing wrong with staying the course. That’s what I’m doing with my low cost DIY ETF index investing approach - at least for now.

Still confused about what Robo Advisors are? Reading this introduction to Robo Advisors should help.

Disclosure: Some links in this article may be affiliate links. We're letting you know because it's the right thing to do. Here’s a more detailed disclosure on how HTS makes money.

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