How to Choose an Online Broker for Your Retirement
Robo advisors are the next big thing to help manage your retirement accounts. But that doesn’t mean that you should rely completely on automated investment programs to help grow your retirement funds.
Financial advisors recommend that consumers who want to experiment with self-directing their own retirement accounts consider working with robo advisors for routine trades of low-fee funds.
But advisors say, too, that these consumers should also meet with human financial advisors to review their retirement accounts on a regular basis to make sure that their robo advisors have them on track to meet their financial goals.
It’s this combination of automated online brokers and human financial advisors that often provides the best financial results for some investors, say financial advisors.
“I believe that online brokers can be a good option for people who are very in-tune with their finances,” says Tony Gentile, a former financial advisor with Elite Wealth Advisors in Sarasota, Florida, and now with Largo Real Estate Advisors. “However, and this is a big ‘however,’ I still encourage those who consider managing their retirement accounts themselves and online to arrange a quarterly meeting with a trusted financial advisor. Having an objective party offer suggestions can help you avoid any potential pitfalls that you might not see coming down the road.”
How robo-advisor investment programs work
Robo advisors have become popular because they are relatively inexpensive. Most companies offering this service charge fees of 0.15 percent to 0.35 percent of their clients’ assets. These clients fill out questionnaires about their financial goals. The robo-advisors then invest their clients’ funds in certain assets depending on these answers.
Usually, robo-advisors invest in low-fee exchange-traded funds, better known as ETFs. Brent Dickerson, owner and certified financial planner with Trinity Wealth Management in Lubbock, Texas, says that the benefit of investing with a robo advisor is that consumers can invest their retirement funds cheaply and end up with a diversified portfolio.
Cons to using robo advisors to make investment decisions
The downside? Robo advisors are not human beings. And human beings are generally better at helping consumers tweak their savings and investment activities so that they have a better chance of actually living a comfortable retirement, Dickerson said.
“The downside is that it is simply an algorithm processing bits of data,” Dickerson says. “You can’t ask it questions. You can’t customize or personalize it. And it doesn’t care what your goals are. Robo advisors simply invest your money at a cost-effective rate.”
Elle Kaplan, CEO of New York’s LexION Capital Management, agreed, saying that while robo advisors can help provide general guidance for consumers, they can’t account for all the complexities that saving for a comfortable retirement can entail.
“A successful retirement involves living comfortably for 20-plus years without any additional income,” Kaplan says. “It’s not enough to merely start saving. To pull off retirement, you’ll need a unique road map and plan that adjusts to your changing goals and needs. This isn’t something you’ll find from an online broker.”
Which investors are a good fit for robo advisors?
Keith Fenstad, a certified financial planner and one of the owners of Tanglewood Wealth Management in Houston, says that a robo advisor can add value to the investor who doesn’t know how to begin an investment program and doesn’t have the funds available to hire a financial advisor to serve as a guide.
It’s better for such individuals to work with a robo advisor than it is for these consumers to do nothing to save for retirement, Fenstad said.
But a robo advisor should not be considered a long-term replacement for working with a trusted financial advisor over a long period of time, Fenstad said.
“When you work with someone face-to-face, it helps instill that discipline in you to stay the course and see the big picture,” Fenstad says. “Many times, people will make trades based on emotions. The market might be going through a bear market or a decline.”
Fernstand elaborated on what happens when they see the value of their investments decline.
“That weighs on them, and they decide to throw in the towel and sell it all. They then completely miss the recovery. If you’re working with a financial advisor on a long-term plan, you’re less likely to make those emotional decisions that don’t fit in a long-term plan.”
How to find the right robo advisor for your investments and retirement
Finding the right online broker is not unlike searching for any financial advisor. Dickerson said that it’s important to work with an online broker that can trade the products you want cheaply and effectively. You also want to review the fees that this broker will charge in writing so that there aren’t any unpleasant surprises.
David Lyon, CEO of Chicago-based Oranj — a digital practice-management solution for traditional advisors — said that consumers need to look at their own financial needs to determine whether a robo advisor, traditional financial advisor, or a combination of the two makes sense for them.
Some investors are savvy enough to not need advice on creating a financial plan or making smart money decisions. These investors might only need help managing their investment accounts, something that a robo advisor might be able to do for them.
Other investors, though, might need a more comprehensive approach to financial planning. They might need a human financial advisor who can help them create a workable household budget, set up a plan for retirement savings and help them set aside the right amount of money to help fund their children’s college educations.
For these investors, meeting regularly with a trusted financial advisor might be the right choice, Lyon said.
“One of the biggest pitfalls of working with a robo advisor is that the personal relationship might be absent from the process,” Lyon says. “Financial decisions are emotional. Working either with a virtual advisor or someone whom you don’t know as intimately might not be the best choice. Working with advisors who don’t know you or who don’t really understand your financial goals can leave some value on the table.”
