Brenton: Before we get started with today's episode, I wanted to let you all know that we've decided to open up our listener mailbag, so to speak, and start doing some question and answer segments or question and answer full episodes based on the number of submissions we receive. But we wanna make sure that if you are part of our community and you've been tuning in and there's a topic you may want us to cover, that you have the opportunity to do so.
So if that's the case, you can email us at
[email protected]. We'll reply if we plan to have that on one of our episodes, to let you know when it'll be posted.
So if you have something that you want featured, send us that email and we will see what we can do. All right, let's get started.
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Brenton: Hello, this is Brenton Harrison of New Money, new Problems, and your host for the New Money, New Problems podcast. If you've been with us in the last few episodes, we have been trying to expand your knowledge base when it comes to available investments that are in the marketplace, but we haven't touched much on who's making the investment decisions in that account. And in this episode, we're trying to, uh, give you that first foray into investment management.
And we've talked in earlier episodes about the structure of investments, specifically.
We've talked about brokerage accounts, and we mentioned that when you open a brokerage account, it's essentially just a blank canvas. It's a house in which your investments will be placed, but until you put the money in and make a decision on what couch is supposed to be there, what bed frame, what decor, what color you're gonna paint, then it's really [00:02:00] just that blank white canvas and there's nothing going on.
Your money is sitting in cash.
Now in the episodes where we've talked about the different investment vehicles, if you feel comfortable and we'll try to continue giving you tools so you'll feel more comfortable over time, you can go in and you can make investment decisions on your own. You can decide to place money in an index fund or an exchange traded fund, or a mutual fund, or even an individual stock or an individual bond.
All of those things can be housed inside of that brokerage account.
But there are people out there who don't have any desire to be the ones deciding when to buy or sell, or trying to learn how to evaluate these different equity positions or Debt instruments.
And in those cases, they often seek out the help of an investment manager or an investment advisor representative. In future episodes, we'll talk about how an investment advisor representative comes into the picture, but an investment manager is a team of people. It's a company. In some cases, it's an individual that you as an investor are paying a fee to make the [00:03:00] decisions on how to structure that account for you and on a day-to-day basis to make the trades as needed to help you achieve your objective.
Now I wanna be clear that the investment manager is different than the brokerage company. They're a separate entity that you are paying to come inside of your brokerage account and make decisions on when to buy and sell and what to include in the original portfolio in the first place.
Going back to my analogy about opening a brokerage account and having it be just this house or this blank canvas, until you decide what goes inside of the account, using an investment manager is almost like hiring an interior designer or a consultant to come in and make those decisions on your behalf.
In years past, in order to have access to one of these third party managers, there had to be a go-between entity called an investment advisor representative that established and maintained that relationship.
As a matter of fact, when I started in the industry, I can't recall there being an option for a retail investor to work directly with an investment [00:04:00] manager. There was always that go between person as the investment advisor representative that was not only there to help facilitate the relationship, but also charged a fee which adds cost to the relationship.
Now, I'm an investment advisor representative. There are times which we'll talk about in future episodes that I think it's appropriate to pay that fee to have that person that's there in your corner and establishing that relationship. But there are also plenty of times where that added layer is added cost that is unnecessary given the client's goals.
And thankfully, recognizing that those situations do exist, there are now plenty of opportunities for a retail investor to establish a relationship directly with an investment manager. And they can help with the initiation, construct that portfolio and also completely manage it for them over time, stripping them of the responsibility of trying to figure out how to put that portfolio together themselves.
And the most popular form of this direct connection between the consumer and the investment manager is that of a RoboAdvisor.
And [00:05:00] after the break we'll tell you exactly how these tools work for those who are seeking these similar services.
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Brenton: If you're following along with us on screen, we're reading from an article from Investopedia about what a RoboAdvisor is and it says, and I quote, A RoboAdvisor is a digital platform that provides automated algorithm driven financial planning and investment services with little to no human supervision.
A typical RoboAdvisor asks questions about your financial situation and future goals through an online survey. It then uses that data to offer advice and automatically invest for you.
Here's what this means put more simply. When you open an account with a RoboAdvisor, you're typically opening an account with an entity that is using algorithms to decide how to construct a portfolio and what trading decisions to make over time.
The goal of a RoboAdvisor is to give you that [00:07:00] personalization in terms of making sure that you have a portfolio that doesn't remain static. It changes as the market changes, but to do so without making you pay an exorbitant fee to access that level of service. And the way they make sure you don't pay that exorbitant fee is rather than paying a team of individuals to sit and pontificate about what trades should be made on a daily basis, they set up a computer algorithm to make that decision for you.
And as a result, they can charge you a substantially lower percentage of your assets in order to establish that relationship. I would say that your typical investment advisor representative might charge 1% on assets under management, and then if they're utilizing that third party investment manager, the investment manager might add an additional fee called a record fee or a program fee, or an account fee that might be 0.4% or 0.5%.
Conversely with a RoboAdvisor, remember that you first don't have the investment advisor representative, and a RoboAdvisor might charge as low as 0.15% or 0.25% of a [00:08:00] portfolio, which means that you are getting automated investment services. And if you had a hundred thousand dollars account with that entity, you would be paying a little more than $20 a month to access these services.
Further down in the article, and I'm quoting, it says Today, most roboadvisors use passive indexing strategies that are optimized using some variant of modern portfolio theory.
So what is Modern Portfolio theory? Essentially, modern portfolio theory is a style of investing that says that rather than having a conservative investor just choose a conservative investment or an aggressive investor just choose an aggressive investment, the best way to establish a portfolio that meets your objective is to actually include a blend of high risk, high return assets and low risk, low return assets. And that blend and the percentage of which side of the fence is included is all based on your risk tolerance.
As an example, let's say that on a scale of one to 10, in terms of the level of aggression that an investor [00:09:00] can stomach in their portfolio, they are five. They're right now in the middle. Well, rather than going to try and find a particular tool or a stock or a bond or mutual fund, that is a five, modern Portfolio theory says that you should have a blend of high risk, high return assets and low risk, low return assets that when combined will come together to equal a five.
And in that scenario, it would allow you to have a higher return for the expected level of risk. And modern portfolio theory is all about asking you the questions that are needed and finding that blend of investments to get the perfect portfolio, quote unquote perfect portfolio that gives you the best chance of achieving the highest rate of return for the expected level of risk.
Now, the way that most Roboadvisors do this is they ask you a series of questions, and based on those answers to the questions, they give you a risk score or a risk tolerance.
As a matter of fact, if you are following along on screen, we're actually looking at the website of [00:10:00] a RoboAdvisor named Wealthfront. This is not a recommendation for Wealthfront. They just happen to have a website that allows us to see this pretty easily.
But with Wealthfront, as with many other Roboadvisors, they would ask you a series of questions and they would give you an assigned risk score. Now, if you're following along, you can also see that I can lower or increase that risk score, and as I make changes to the risk score, the portfolio changes.
As an example, if I lower that risk score to a six, then instead of 85% stocks, 15% bonds, it goes all the way down to essentially 70% stocks and 30% bonds.
Because if I've shown them that I don't have the same appetite for risk, they're going to try to find a new blend of high risk and low risk assets that give me the highest expected return for the acceptable level of risk.
Now, there are a number of reasons that Roboadvisors have become popular over the years. The first is obvious. You're paying a lower fee by not including that investment advisor representative. [00:11:00] And by using an algorithm, instead of paying a team of individuals, you're also paying a lower fee for that investment manager.
I would say that when you look at the tools in which many of these roboadvisors invest, another reason that they're popular is because they use a blend typically of index funds and exchange traded funds, so if you're a person who believes very strongly in diversification, in passive investing, then having these index funds or exchange traded funds allows you to invest the way that you intend to while having that added layer of professional management along with your own inclinations.
Another reason these accounts are popular is that by utilizing mostly index funds and exchange traded funds, the tax impact, especially in non-qualified accounts, is typically reduced as compared to a portfolio that has a number of mutual funds inside it.
These accounts are also relatively easy to set up. They don't have high account minimums. You might have an investment advisor that won't accept accounts that are less than 50,000 or a hundred thousand [00:12:00] dollars, but with a RoboAdvisor, you can open an account with a few hundred bucks and have that service added on to an amount that's that low.
And in terms of your ability to understand the setup process, they've done a phenomenal job of making it consumer friendly. I would say a significantly better job than my industry has as a whole in terms of professional advisors.
So in our society where most people are pretty tech savvy, if they can figure out how to open an account and have an online savings account, they can surely navigate the process of opening an account with one of these roboadvisors and establishing those services.
Many of these advisors also offer the ability to do things like ESG investing, where people who have certain environmental or moral concerns can have a portfolio that adheres to those standards.
So there's all these things that come together to make Robo-advisors a really attractive feature for someone who's trying to get that management, but may not have the ability or the desire to bring third parties to the table. And I think it's a welcome addition in terms of having another tool in your toolbox as a lay investor. I have [00:13:00] said that there are many scenarios where I think it's worth paying a fee to an advisor, but that's not every situation.
In the next episode, we'll talk about what some of those times may be and how I help people decide when to use the services of an investment advisor representative like myself versus utilizing the services of just a RoboAdvisor and doing some things on their own.
But if you've been listening to these episodes about investments, you probably are falling into one of two camps. The first camp may be the type of people who are saying, man, this sounds really interesting when you talk about index funds and ETFs and stocks and the like.
I can't wait to open my own account and try to go through the process of evaluating and picking these myself, then that's great. But there are others who are like, man, this is interesting.
This is great. There's no way I have the time. It's too daunting. Whatever the cause may be, I have no interest in putting together my own portfolio. And if that's you, but you still would like to invest, a RoboAdvisor could be the difference between you continuing to sit on the bench or actually getting in the game.
And if that is that difference, then [00:14:00] I welcome it.
I hope you'll join us next week as we talk about the role of an investment advisor representative. I also hope that if you have questions you'd like to cover on the podcast, that you'll send an email to info at New Money, New Problems dot com, and we'll get those answers to you as soon as we can. See you next week.
