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The Pros and Cons of Managing Your Investments Online

    

SUMMARY: Thinking about using a robo-advisor or managing your money online? Here are the pros and cons you should consider before putting your cash to risk.

Financial planning, like transit, groceries, retail, and countless other industries, is in the midst of a disruption. Alongside Uber, Instacart, Square and Amazon, now comes Betterment, Wealthfront, and Personal Capital, presenting viable alternatives to what was once a business that relied solely on face-to-face interactions.

The mission of these companies is simple: Remove the time-consuming—and sometimes confusing—work of portfolio management from your to-do list, freeing you to focus on actually earning your money. These tools fulfill the technical part of these duties comparably well, but often lack a human touch (and gut instinct).

So, should you manage your investments online? Well, that depends ...

investment online

What’s the difference?

An online investment platform—known more commonly as a robo-advisor—is essentially a series of algorithms that create and track your portfolio. First, you tell it how much money you want to invest, what your ideal time frame is and how much risk is too much. Then, you answer a few additional questions, and the computer builds a portfolio—usually consisting of low-cost exchange-traded funds (ETFs)—that fits your needs. There are still humans who monitor things behind the scenes, but the algorithm leads the way.

A personal financial advisor is a flesh-and-blood person who manages all aspects of how money affects your life, not just investments. This can include estate planning, trusts, college savings and homeownership. As your career progresses and your finances grow more complex, in-person conversations become more necessary.

The decision really comes down to your income level, financial goals, retirement time horizon and several other factors.

The pros

Simple and affordable

If you’re just starting to grow your nest egg, every dollar counts. You likely don’t need to split it up across too many assets and certainly don’t need to be concerned with advisor fees. The low-cost index funds that make up a typical online portfolio outperform an active investment strategy 80-90 percent of the time, so your money is in capable hands.

DIY-friendly

If you fix your car when it breaks down, handle all repairs around the house, and want to be the captain of your financial ship, then a robo-advisor can be a great partner. If you have a brain that geeks out when delving into the inner workings of FINRA’s (the Financial Industry Regulatory Authority’s) free financial tools and quizzes, you’ll love to explore the details of your online portfolio and nudge the algorithm when you see unexplored opportunities.

Efficient taxes

Many robo-advisors bundle tax-friendly features into their service plans, such as automated tax-loss harvesting (which offsets short-term market losses against gains, so that the latter are not taxed) and automated asset location (which boosts after-tax returns).

The cons

Lack of complexity

If you’re young and single with no real estate assets, dependents or immediate retirement concerns, a robo-advisor may be a great fit. But if your needs are more complex than just your 401(k), or your life now involves marriage, family, homeownership, illness or impending retirement, you may require a more personal solution. A seasoned professional who’s actually there on the other side of the table or on a phone call can help steer you through life’s rougher patches.

Poor bedside manner

Market volatility, divorce, loss of a job, health concerns—these personal and professional setbacks are inevitable to some degree and can do a number on both your confidence in your investment strategy and your diligence in sticking to it. There’s only so much an algorithm can do to assuage your fears when the Dow drops 1,000 points or your child’s college tuition come due. In these circumstances, you need a real-life voice to keep you on a steady path.

Explore your options

You don’t need to definitively choose only one option. If you’re new to investments, take a robo-advisor for a test drive and see how it rides. Odds are that at some point, your financial needs will require a more hands-on, human approach. Consider meeting with a TDECU Wealth Advisor when you're ready to make that transition.

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