I let a robot handle my money. Should you?
Pros and cons of DIY versus robo-advice (plus, zeitgest-y pop culture 🆕)
In this issue:
Fees, autonomy, learning curve, and risk are what to consider when letting a robot handle your money, versus doing it yourself
Zeitgeist-y: A new end blurb of things I’m watching, reading, and consuming as it concerns popular culture and, you guessed it, today’s zeitgeist
An editor from a big morning email newsletter (approx. 1.5 million daily subscribers) recently asked me to share my thoughts on whether “robo-advisors” are good ways to save and invest money.
If you don't know what a robo-advisor is, then it’s basically a computer who manages your money for you.
A little over a decade ago, companies like these started popping up in response to high-cost mutual funds and brokerage houses that charged ambiguous fees and earned commissions when making investment recommendations.
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The premise was that a computer could do as good of an objective job at managing your money for you (and for cheaper) than a human being at a brokerage, who might stand to make money on financial products that you might not need.
Obviously a lot has changed regulation-wise and nowadays all financial institutions and advisors must ensure any products are in your best interest (can you believe it actually took regulations to enforce this behavior?).
But also, robo-advisors gave a lot of tech-savvy younger people entrée into the world of investing.
Up until then, investing was seen as too complicated to get started—there was a higher barrier to entry, and there were so many products available you almost just wanted a human to tell you what to do.
Robo-advisors aimed to change all that.
To get started, you enter factors like your tolerance for risk, how much you want to save, and how much time you have remaining before a certain investment goal, like retiring, or buying a house or car, having a baby, and getting married.
Based on your criteria, the algorithm (the process a computer follows based on a set of rules) then optimizes an investment plan and manages your money for you, including, in some cases, finding tax savings.
My former employer
I’m not sure if this newsletter editor did any digging into my background, otherwise she’d know that I was also once a content manager at one of the first and most successful robo-advisors, Betterment, which continues to be a leading fintech company based out of New York City.
Of my time there, I had mostly good than bad experiences, and I learned a lot, most importantly what I needed to start my financial content agency, Scribe.
I wrote out my answers to her questions, but due to my travel schedule I believe I missed her deadline by several hours (whoops).
Instead of letting my insights go to waste, I figured why not make them public and share here, among my loyal Substack newsletter readers.
There are certainly pros and cons for both investing with a robo-advisor or managing your own money.
It really boils down to your personal financial situation, risk tolerance, and how much time, effort, and education you have, or are willing to dedicate toward managing your money.
So here it is: What are there pros and cons to using a robo-advisor, versus DIY investing? I hope you’ll find my answers helpful.*
Pros and cons of using a robo-advisor vs. DIY investing
Pros of robo-advisors
With a robo-advisor, you can generally enjoy the following:
Low management fees, though you ought to understand concepts like expense ratios by product, and how much you are paying for them manage your money. Though they market themselves as “low-cost” and generally being “less expensive” than traditional wealth advisors, this may also because of the types of investments they offer, for example, low-cost ETFs, which may or may not suit your risk appetite
A large menu of investment types, e.g., Roth or Traditional IRAs and traditional brokerage style or tax-advantaged accounts.
What’s the difference between a Roth and Traditional IRA, you ask? To keep it simple, you’re either paying taxes now or later, respectively.
For a Roth IRA, you might invest with money left over from your paycheck (which you’ve already paid income taxes on).
For a Traditional IRA, you pay taxes on your investments when you withdraw the money, closer to retirement ageA large menu of investment products, e.g., ETFs that follow a popular theme (crypto), index (S&P 500), or asset class (large cap stocks), or target date funds (TDFs) that may adjust and rebalance investments or risk accordingly depending on a future date (e.g., 2050, 2060, 2070) for when you would like to retire
Relatively hassle-free, hands-off, and low maintenance investing. You may wish to automate your savings into your robo-advisor account(s), which will then manage your portfolio based on your risk parameters and preferences. You can make changes to your risks or investments.
Some companies even offer features to spot and execute on tax savings for you, like “tax loss harvesting”
Cons of robo-advisors
Control: I would say the biggest con of robo-advisors may be that you have to play by their rules (including any rules about buying or selling investment types, and paying fees) and you generally are limited to their menu of investment types and products. It’s not a dealbreaker if you’re a “set it and forget it” kind of investor
No day or time-sensitive equity trading: Most robo-advisors won’t offer trading services of individual stocks or bonds.
The goal is to be less active about managing your money and keeping things passive, hence lower cost.
So if you want to buy individual shares of NFLX or NVDA, then you’ll need to head to a brokerage house like Schwab or Robinhood.
Again, this isn’t a con if you are going to be fairly hands off your investments, and all you’ll be doing is adding money to your portfolio and letting it compound over time, and you have no interest in day trading.
Remember, attempting to time the market by buying and selling stocks in the short term has proven to be a losing game, especially if you have no idea what you are doing.
Now, with self-directed investments, the onus is more on you and your knowledge of different kinds of asset classes to invest in, and then managing your portfolio on your own.
Pros of DIY investing
Here, you can generally enjoy the following:
Total autonomy over managing your money, including which banks, investment companies, brokerages, types, and products you’d like to invest in.
You can directly buy, hold, and sell individual stocks, bonds, commodities, and even crypto, based on your ordersCosts: (If you know what you’re doing) you can also manage your money at fairly low costs, e.g., many brokerage houses today offer no commission trading
Cons of DIY investing
Learning curve, education, and research is all on you: Of course, the major con here is (that if you don’t know what you’re doing, then) you’re risking your hard-earned money.
Risk — it’s all on you: For example, if you’re purchasing risky alternative assets like crypto and you don’t set limit orders or know when to take profits, then you could lose all of your original investment.
You may also miss out on the benefits of well-rounded investment products that aim to mitigate risk, while also seeing a good return over time, without your interference.No tax optimization strategies: You may also miss out on tax saving strategies, or run into unnecessary taxes (i.e., read up on capital gains rules).
The rule of thumb would be to not invest more than you can afford to lose. Otherwise, leave it to the professionals and robo-advisors.
Finally, there’s NOTHING wrong with doing both to really diversify your investments.
For example, I have a robo-advice retirement account, but I also have self-directed brokerage accounts where I’ve picked my own basket of equities, ETFs, and I’ve purchased bonds myself.
I also invest in and manage my own crypto portfolio and have done so since 2016.
The caveat is that my background was in finance, and I’ve written, edited, and read a LOT of investment documents and research, so I know a bit of this stuff already.
But I don’t claim to know it all and that’s why I also have an advisor who keeps me in line.
As your wealth and personal financial picture changes with major life changes, consider seeking out a financial advisor and tax professional who can assist.
Don’t avoid hiring and paying specialists for advice. Spending a little money with these kinds of folks can save you a lot over time.
And now…my new weekly blurb of popular culture.
Zeitgeist-y
Movies
This week, I went down a rabbit hole marveling at the sheer volume of dracula movies. First, there was the silent film 1922 Nosferatu, and then the 1931 Dracula with Bela Lugosi, and then Werner Herzog’s 1979 Nosferatu the Vampyre, and then 1992’s Bram Stoker’s Dracula where Gary Oldman looks like he’s got a butt on his head.
So, I’m looking forward to watching the new Nosferatu this December. (The cast includes Bill Skarsgård is Count Orlok the trailer is pretty creepy).
Shows
I sped-watched through the first 5 or so episodes of Netflix’s crazy new Korean cooking competition show, Culinary Class Wars, which pits professional/formally-trained vs. amateur chefs.
I have to say, it’s pretty freaking wild — the dramatics, the flair, the reality survivor element, but what’s really cool is the blind taste-testing by two main judges: 3-star Michelin chef Seung Ahn (who has the most perfect hair) and counterpart, celebrity cooking show host Paik Jong-won. Just watching them blindfolded while being spoon-fed heaps of food and their “Ahhhhs” and “Hmmms” makes me cackle every time.
And, though I generally avoid shows related to the finance world, I’m really looking forward to Sunday’s season finale of Industry, on Max. This season’s writing has been stellar…adding Jon Snow to the cast was also a win.
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Until next time,
Shindy
On Instagram + TikTok
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*I’m not a financial advisor and what I’ve written shouldn’t be construed as financial advice. You should do your own research and/or consult a financial professional before making any money decisions. My insights are based solely on my almost 20 years of professional experience in financial services and finance-adjacent companies, which also includes creating wealth and investment advice content for some of the country’s best known financial companies, banks, and wealth managers.
