Do You Really Need a Robo-Advisor?

You Can Replicate Some of Their Services Yourself… But It Won’t Be Easy.

businesswoman standing on robot arm
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Robo-advisors are a wonderful way for those with virtually no investment knowledge to build a well-run portfolio that is optimized for their unique needs. But robo-advisors are not free, with fees generally starting at around 0.25 percent of your portfolio value per year. With that in mind, you may be wondering if you can do what your robo-advisor does on your own, while paying less in fees.

The answer is that you can do much of what a robo-advisor does on your own, but you can’t do everything that a robo-advisor offers. Let’s take a look at what you can do to mimic a robo-advisor on your own, and when you may decide it is worthwhile to hand over your portfolio for a computer to invest.

How You Can Emulate a Robo-Advisor

In a basic sense, a robo-advisor is a computer program that chooses low-cost mutual funds for you based on your risk tolerance, age, and investment goals. If you have a basic understanding of how mutual funds and investment risk work, you can easily buy mutual funds on your own without paying someone, or a computer, to do it for you.

Most robo-advisors purchase shares of low-fee mutual funds and ETFs from specific fund families. Popular fund families for robo-advisors include Vanguard, iShares (Blackrock), State Street (SPDR), Fidelity, and others. The robo-advisors don’t have access to any special funds you don’t. In general, if a robo-advisor can buy it, so can you.

Most robo-advisors are focused on helping you save and invest for retirement. You can setup recurring automatic funds transfers and setup automatic investments every payday in your favorite retirement investments.

The most important part is that you choose the right low-fee mutual funds or ETFs for your goals and ignore market volatility. If you invest consistently over a long period of time, the markets have always gone up. Whether your funds are held by a robo-advisor or in another investment or retirement account, the results should be similar.

What You Can’t Do

While you can easily build a portfolio that looks nearly identical to what you get with a robo-advisor, robo-advising tools do more than just pick mutual funds and ETFs for you. In particular, these three robo-advisor features are hard to mimic as a solo investor managing your own portfolio:

  • Tax loss harvesting
  • Automatic rebalancing
  • Adjusting your holdings over time

You can reach some level of comparability of these features on your own, but it may not be easy or worth the time involved. Here is a breakdown of what the robo-advisors do and how you can try to follow along.

Tax Loss Harvesting

Tax loss harvesting is a technique of selling investments for a loss when they are down, and rebuying a similar asset right away. This captures a loss for tax purposes in your portfolio, which you can use to offset capital gains from winning investments. For example, if you are holding shares of the Vanguard S&P 500 index fund and experience a $1,000 loss, you can sell the Vanguard S&P 500 fund and buy a different index fund (perhaps a Schwab S&P 500 index fund, or just a different Vanguard fund) with the proceeds.

You hold roughly the same asset at the end, but because you’ve sold an investment at a loss, you can deduct that $1,000 loss from your taxes.

You can do this manually on your own, but doing so efficiently and effectively is practically a full-time job. Robo-advisors constantly scan the markets for opportunities to capture losses in your portfolio, and you can’t realistically get the same results on your own. For instance, Betterment—one of the largest and most popular robo-advisors—advertises that customers can expect a 0.77 percent better after-tax return on their investments with its Tax Loss Harvesting+ product.

Automatic Rebalancing

When you create your portfolio, you should work toward a target asset allocation. For example, you might want an aggressive portfolio that is made up of 90 percent stocks and 10 percent bonds. But over time, your stocks will probably grow faster than your bonds, and eventually you may find your portfolio is 95 percent stocks and 5 percent bonds, or something else that is outside of your target allocation.

If you are the only driver behind your account, at some point in the future you may want to sell some stock assets and buy some bond assets to bring your portfolio back into your target alignment. As a human investor, you would have to make those decision on your own, and would need something like a calendar reminder so you don’t forget to run through the manual rebalancing process.

Robo-advisors can do this for you while you sleep. You don’t need any reminders. You don’t need to pick the assets to buy and sell. While you can do this yourself, robo-advisors tend to do a much better job. After all, they are thinking about your money 24 hours a day, while you probably have other things on your mind.

Adjusting Your Holdings Over Time

Last but not least, robo-advisors are much better than humans at shifting your assets to a more conservative portfolio over time. Sure, you can sell a couple percentage-points’ worth of stocks and buy more bonds, but doing these little tweaks can be cumbersome and easy to forget.

You can replicate it yourself with target date fund funds, but robo-advisors can take care of it while you are off on vacation, busy at work, or doing anything else but spending time working on your portfolio. Plus, target-date funds tend to charge fees comparable to what you’d already be paying a robo-advisor.

One of the biggest challenges in managing this yourself is self-discipline. You can adjust your target portfolio over time, but will you actually do it? Most investors find it is much easier to hand off this type of minute detail to investment professionals, which can be a financial advisor or a robo-advisor. With a robo-advisor, you know you are getting industry leading service at a fraction of the cost of human advising, and you have very little to worry about in the day-to-day management of your investments.

The Verdict: Robo-Advisors Are Worth the Cost (Usually)

Even for well-educated, experienced investors, robo-advisors can do in the blink of an eye what it takes us humans hours to do ourselves. You may be able to replicate some of their value through use of target-date funds and your own active portfolio management, but it may not be worth the time you sink into it. And if you’re making taxable investments—that is, you’re not investing in a tax-deferred Individual Retirement Account—then the tax-loss harvesting offered by most robo-advisors is well worth it.