Personal Finance

Meg Green: Robo advisor or real? You get what you pay for

The dilemma:

I know you’re in the financial advisory business, and that is how you make your living, so I appreciate the prejudice you’ll bring to my dilemma. But I’d like to hear your take on investing through a robo advisor verses a real person. I just inherited over $2 million from my father’s estate, and it’s going to be ready for me to take over soon. Dad’s advisor is making a pitch to keep the money with him in his firm. My wife and I met with him and asked the questions we felt we should, including how much he charges. The fees run more than 2 percent a year! I have been doing my own investing in my IRA with a robo advisor, just me with them on the internet. The whole cost is just .40 of 1 percent for everything. Why can’t I invest my inheritance with a robo advisor and save a bunch of fees?

Meg’s solution: You can. It’s always your choice. What you’re actually asking, though, is what is the value of the advisor, and is it worth paying him $32,000 more a year than the robo advisor commands? That, my friend, totally depends upon you as well as the advisor you choose.

First, may I suggest that there are many advisors who are much more cost efficient than your father’s broker. In my book, 2 percent is high. With a $2 million portfolio, you should be able to get the finest advisors and money management combined for close to or under 1.5 percent in total fees, mostly tax deductable. Of course the bigger the portfolio, the higher the discount, and everyone discounts for volume. Or should.

But is the value there? Let’s dissect what that extra 1.6 percent can bring you.

▪ Discipline. Individual investors tend to flee the markets when they should be adding on, and often need hand holding to stay. They tend to buy what’s hot and sell what’s cold, and hurt themselves along the way. CNBC becomes the advisor…only when the TV is on. Studies show that over the last 20 years, individual investors have averaged 2.5 percent per year while a 60/40 portfolio returned 8.7 percent. There’s your 1.6 percent and then some.

▪ Risk Tolerance. I went to sign up with a robo, and my age alone told them what my portfolio mix should be….40/60, bonds to stock! The young guys in my firm were told to invest in 90/10 portfolios… stocks to bonds. Nowhere did they take our tolerance for risk into account. Investing tolerances have little to do with age, except on a “supposed to” basis. I’m way more aggressive than my age “allows”. If you’re not in the right portfolio for you, you’re going to be unhappy, and who’re you going to call? In our industry, there are very strict “know your client” rules…for a reason.

Tax loss harvesting is huge in the wealth management arena, and done right, can often save you enough taxes to cover the fee. Your robo advisor doesn’t know you sold your land or a building; can’t go into the portfolio and swap out of one position for 31 days and back in to take losses for you. You can, but do you know how? Have the time and energy?

Some robo advisors keep up to 30 percent in cash so you’ll have money for cashflow and fees. That’s the lazy way…the robo way. A good advisor can help you manage cashflow from a portfolio, which can be an art. Take from the IRA first? Convert to a Roth? Spend down the annuity? Selling your home? There’s a lot on a financial plate, and without good advice, you could find yourself making the wrong moves. It’s not easy.

Money has never walked into my office alone. It always comes attached to a person, a family, a business, a living entity with needs, goals and wants. Is the estate plan well done? Are assets registered properly? Are there issues with kids, parents, partners, each other? Much of wealth management is personal…very, and I’d like to believe that each advisor puts a lot of energy into the ‘value added’ portion of the relationship. If not, then either find one who does, or let a robo advisor do a much cheaper job, remembering you get what you pay for.

Got a dilemma? Email Meg Green, CFP, is a wealth manager with offices in Aventura. Her Money Dilemmas column runs monthly in The Miami Herald.