I think that currently robo-advisors are still not very useful for those who want to create an income with minimal effort.
To be objective, I find robo-advisors to be a great alternative for the general public. Definitely better than the financial advisor in the bank who helps the bank and not you.
Not everyone is financially savvy or doesn’t have the time/will to become one like the people you’ll meet on this and other sites. However, for me Robo-advisors are the example of expensive spending for easy service.
Robo-advisors don’t do much different than what you or I could do with a little discipline and effort.
The Robo-advisor has three main elements:
- The asset allocation
- Continuous rebalancing (in measure) with the target allocation
- Collection of tax losses to offset capital gains and losses and pay less tax
None of these require a degree in quantum physics. Moreover, we have already covered the first 2 in this blog.
For the third, the story is a little more complicated because it varies from state to state. My advice is that given the nature of us passive investors, this is not impossible to study and calculate on our own.
In any case, everyone has a family accountant for tax returns (especially in Italy) and you can leave the task to him for a reasonable fee.
The costs are in my opinion the worst part anyway. Commissions generally range from 0.25% to 1%. Which means that they go from double to 8 times the TER of my investments. TER which must however be added together with other bid-ask costs that neither we nor the Robo-Advisors can avoid.
However, let’s assume only 0.25% per annum. Let’s assume a withdrawal rate of 3%. Then our assets would be eroded by an equivalent 8% of our annual consumption. In 12 years and a half you will miss one annual withdrawal. Not much, but enough to put you in a crisis if there is a downturn for the markets.
I still think robo-advisors are a great product for the vast majority of people. But we want to be a little smarter than the average investor.
If you can’t control your biases and emotions, then better use a Robo-Advisor until you work through it. Which also means for life. Better a loss of 0.25-1% per annum than making continuous trading mistakes.