Posted: Feb. 5, 2018, 10:22 a.m. by jprobasco
The 3 main choices people have for investing include hiring a professional financial adviser, using an algorithm-based robo adviser and do-it-yourself. There are arguments for and against all 3 approaches as well as arguments in favor of a hybrid approach that utilizes 2 or 3 systems.
For those willing and able to learn the ropes, do-it-yourself investing has a lot going for it. It also has important cautions attached that can make it difficult if not downright dangerous.
Among the reasons you might want to consider doing your own investing, the No. 1 factor is typically cost. Simply put, do-it-yourself is cheaper. Whatever you pay a pro for advice is money you can’t invest and earn a return on. If your portfolio, for example, is large enough that you find yourself paying $10,000 per year in adviser fees that same $10,000 invested for 30 years at 8% would grow to $1.2 million. That’s leaving quite a bit on the table.
For those who are certain they can’t do a better job than their adviser, keep in mind you don’t have to. You only have to do better than the difference between what you would pay your adviser and the return your adviser generates. If you are brand-new to investing, this may be difficult to do and you may well be better off using a pro. At least for now.
The Learning Curve
You probably don’t need to know as much as you think you do in order to be your own financial adviser. You don’t have to know everything about all stocks or sectors – just the ones in which you are invested. That’s not an inconsequential amount of learning. It will take time and study. Again, if you are a neophyte, it might make sense to obtain professional advice until you get your financial sea legs. Think of it this way. Time you would otherwise be spending evaluating and searching for an adviser could be spent learning how to do your own investing.
The advice of successful investors such as Warren Buffett could be very helpful including that of investing in what you know. In other words, don’t choose an industry or sector you know nothing about as your first investment. Stick with areas that are familiar and that you have a reasonable understanding about.
Robo advisors, aka fully automated online investment platforms, have become more and more popular. Even if you buy stocks, ETFs and mutual funds on your own, having part of your investment portfolio managed by a robo platform could be a good thing and could also help alleviate some of the fear do-it-yourselfers often have.
You will pay fees to a robo adviser, but they pale in comparison to the fees you pay a human financial adviser. A professional will charge between 1% and 3% of the value of your portfolio each year. Robo advisors charge less than 1%. In fact, you can find robo advisors with fees as low as 0.15% per year.
The Case For A Pro
Doing it yourself or using a robo adviser mostly can save you money and in many cases time spent managing your investments especially on the do-it-yourself side. A major downside is that you do not have someone to go to with questions or advice. You do not have a professional who is up to speed on all aspects of the market who can help you get in and out of positions at the most opportune time.
The reason most people hire an adviser in the first place is for advice. Theoretically your adviser will help you get a return on your investment that not only exceeds what you could do on your own but also covers the fees you pay. Importantly, when that isn’t happening it may be time to look for a new adviser. Or to consider going out on your own.
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Splitting The Difference
There is another option, one that involves you doing some combination of your own investing along with a robo adviser – or even a robo adviser alone – and then paying a “fee-for-service” to an adviser to help you make good decisions about your investment choices.
Some robo advisors even offer human advice as part of the platform (for a fee). Alternatively, you can hire a reputable financial adviser that charges a set fee for so many hours of advice that is totally free of commission influence and often lower in cost than the amount charged for assets under management (AUM).