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“Robo-advisers” promise to automate your investing, grow your wealth and do it all for (almost) free. Best of all: You never have to sit down with a smooth-talking financial adviser who gets his commission check even when your portfolio tanks.

While robo-advisers solve some problems with financial services, they’re far from perfect. In this episode, you’ll find out how they really make money (Hint: Not the 0,25% transaction fee) and what you should consider before using one. 

Want to find out if a robo-adviser can grow your wealth sustainably? Listen now!

Show highlights include: 

  • The hidden reason big banks love robo-advisors. (2:44) 
  • How robo-advisers make money off of you (even if you’re not paying any fees). (5:57)
  • Why even the world’s best robo-adviser can’t insulate you from volatile stocks, greedy bankers and economic crashes. (8:57)
  • The “IRS fee” you only hear about a year after starting with a robo-adviser. (10:18)
  • Why trading options can evaporate your wealth (even if you make money at first). (12:17)
  • How a robo-adviser manipulated their users into buying 40x more shares (without getting them bigger returns). (14:45)
  • The 50-year old “convention” that makes growing your wealth feel like a rollercoaster ride. (18:55)
  • Why “investing” with some financial apps is like giving your paycheck to Caesars Palace (22:27)

Remember to download Grandma’s Top Tips for an Independent Financial Future by dropping into https://grandmaswealthwisdom.com/free/. It's time for YOU to break through to a smart, stable, financial future.

If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting www.grandmaswealthwisdom.com/call … just like Grandma would want us to do. 

Links mentioned on the show: 




Read Full Transcript

A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.

Amanda: Hi. I’m Amanda, and welcome to Grandma's Wealth Wisdom, where we help you break through to a smart, stable, financial future, with the tried and true wisdom Grandma used.

Brandon: And I'm Brandon, and this is Episode 70 titled “Robo-Advisors: Are they the answer to assets under management fees?” Today, there are over 100 robo-advisory services around the world. We see commercials for them all the time. There are independent startups and long-standing institutions who have computer programs and apps to manage your stocks for you for a fraction of the cost a human would charge you, sometimes even for free. [01:11.2]

Amanda: Yeah, and that free thing is a big deal. Studies have shown and simple math shows that asset under management fees can really eat away at your investments, sometimes even allowing your human financial professional to retire long before you do with their bigger house and their yacht, in the meantime.

Brandon: To be honest, this is an area of the financial world we haven't really addressed on this podcast before, and we're not licensed or authorized to tell people where, what stocks to buy or sell, and we don't plan to because we never want to call someone up to tell them we lost the money. We've done this intentionally in our business. [01:55.9]

Amanda: Yeah, and it's actually that human element that might be what's driving people to the robo-advisors. I mean, you can imagine if you had your account value go down. It'd be really hard to hear on the phone or face-to-face with someone that you've grown to be maybe even friends with that your account balance went down, but when it's just numbers on the screen that are robot is managing and there's no person to point fingers at, that might make the situation a little easier to handle. I mean, maybe. Personally, with how I operate, I like to know who to blame if my portfolio took an unexpected hit.

Brandon: But it's not the professional's fault either. Maybe the human element is what's driving investment firms to use robo-advisors as well. It's going to take a personal toll to tell someone that their balance went down when you couldn't do anything to stop it, and from a management perspective, robots are less likely to act emotionally and from a place of stress when the markets are down or there's bad news to deliver. [03:09.3]

Now, I’ll say being an employer, I could totally relate to maybe having a robot as opposed to having a person because they show up. They're going to be there for work, all that stuff you don't have to worry about, paid time off, any of that crap.

Amanda: Yeah, but robots can break down. They can have to undergo maintenance or stop working, right? Especially if that robots controlled by the internet, often there can be server issues -

Brandon: Yeah.

Amanda: - and that's one big thing that's happened with some of these robo-advisors. People have initiated trades and then they haven't gone through because the servers were down, and that can cost people money when that happens. As much as we want to think robots might be better because they don't act emotionally, they're also still programmed by people, which I think we're going to get into. [04:04.5]

But, sadly, the human element, taking that out of our day-to-day life has happened in all sorts of industries. It's not just with the stock market and these robo-advisors, but let's set that aside for a second. Maybe the whole situation of having a robot help you with your investing, maybe that's worth it for the free management of your money and the free trades that most robots offer, or if they do charge fees, they're much lower than using a human.

Brandon: Yeah, but that begs the question. How are the investments firms making money on robo-advisors? I mean, they're not in it just to be giving free stuff. These robots cost them money to create, cost the money to maintain and protect from hackers—I mean, there's a lot of that stuff in the news—and they've got to be making money somehow, right? I mean, of course. [05:02.6]

Amanda: Right. Now, for those of you who have watched the documentary on Netflix called The Social Dilemma, what we're about to share is not going to surprise you. If you've been paying attention to what's happening with social media in the last 10, 15 years, it's not going to be a surprise what the robo-advisors are also doing. If you haven't seen that documentary.

Brandon: I recommend it.

Amanda: Yeah, it's very interesting. But it was actually several years ago when we first came across one of the memes that's in that documentary. The meme was something like, If you're not paying for something, you're not the customer. You're the product being sold. For Facebook, if you're not paying for Facebook, you're not the customer. You’re the product being sold and their customers are the advertisers who advertise on their platform. They're always going to look out for the advertisers’ best interests than the users, that kind of thing. When we're thinking about these apps and the AI for investing, how are they making their money? [06:06.0]

Brandon: Why would people develop apps for AI and investing if not to make money? When we did the research, we found that robo-advisors are selling the TRE data they collect, right? When you make a trade through the robo-advisor, most robots sell your order to a high-frequency trader who then executes the trade. The high-frequency trader is how the robot makes money.

Amanda: Yeah, so the high-frequency trader is paying for the ability to do your trade for you. Why would they do that? Why would they pay you money just to do your trade for you when you're not paying for that trade? Data, the big four-letter word. They can play the market a lot better. They can repackage and sell that data to others. Data is everything in our world today and especially when it comes to the stock market. The more the better you're able to make decisions and so forth. [07:06.2]

Brandon: Or manipulate things, you never know. We'd ask you, is it worth it if you save money on the investment and transaction fees? Are assets under management fees that can be at least 1.5% or more and can definitely eat away from your growth that many of the …? Let me say this. Let me start over.

We'd ask you this. Is it worth it if you save money on the investment and transaction fees? I mean, assets under management fees can be one and a half or more, and can definitely eat away from your growth. Many of these robo-advisors are fee-free, both to manage your money and for transactions.

Amanda: Your decision here. We just want to help pull back the veil and help what you're really getting into. If you care about your personal data being used for others’ purposes, then consider carefully which robot you use or if you use one at all. Because they are different, they use your data in different ways. [08:10.3]

Brandon: I wonder if they could change things.

Amanda: You’ve got to read the fine print to see what you're actually signing up for.

Brandon: I don't know about you, but those long forms when we sign up for Facebook or when we sign up for it, I don't know if you remember signing up for that, but we signed a big thing saying, yeah, they can have all my stuff, and then they make changes every now and again.

Amanda: Yeah.

Brandon: But the selling of your data might not even be the scariest part of using robots for your stock market portfolio. We've got four more scary things about it.

Amanda: Yeah, and the first three are going to be pretty talked about. Lots of people, if you look up the downsides of the stock market and these robo-advisors going to find these, but the fourth is one we don't think is being talked about nearly enough, and it's going to feel like it's coming from outer space, but stick with us here. [09:03.4]

The first one is that you're still using the stock market. You still have market volatility. There's still risk, right? You're still buying stocks. You don't have any control over if those stock values they're going to go up or down. You can lose a significant portion of your money, or even if over time, it does go up. Those short dips destroy compounding, right? You're not actually having compounding work in your favor when you have that volatility happening. That's a pretty scary part of using a robot for your stock market portfolio or just having stocks in your portfolio at. Right, robots don't get around the volatility of the market overall.

Brandon: But can you elaborate on that a little bit? Because I feel like I hear people say, if you put a lot into it, it's compounding over and over again, but then you just said there's volatility and it breaks compounding. I’m a little…

Amanda: Yeah, I don't think we have time to get into that here. Let's put some links in the show notes for where people can follow up, because I did a really good YouTube video about that. [10:06.4]

Brandon: Okay, cool. Yeah, because I think that that's a misconception a lot of times.

Number 2: taxes are due when you're not making active trades and are charged regular income tax rates. People don't talk about this enough. They only look at the growth and not the IRS fees. That's something that I think we should in our line items account for and see, How much did this actually cost me? Am I actually getting growth? Not just average rate of return, but that whole aspect of the taxes and year over year.

Amanda: Yeah, that there are two things that you can’t avoid, death and taxes. The Internal Revenue Service is still going to take their share, especially when you're actively trading through a robo-advisor and not buying and holding for a long time to go into the capital gains, but then you still have to pay the IRS their taxes as well. It's almost like a fete you just can’t avoid. [11:09.2]

Brandon: Yeah.

Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.

Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.

Amanda: Okay, Number-3, the scariest part of using a robot for your stock market portfolio, it's kind of Part A and Part B of Number 3 here. They both have to do with options. [12:00.0]

A is that most robots have limited options as to what stocks or funds, or indexes that you can buy and participate in, so you might be limited in your options compared with other types of brokerage accounts or different things.

Then Part B of Number 3 here is that these robots also allow you the option to buy options. Options are sort of like bets on stocks rather than the stocks themselves, and as you can imagine, a bet on a stock, an option, is actually riskier than the stock itself, but that can be very appealing.

I want to use this analogy for kind of what would happen. Let's pretend stocks were like sports teams and you could invest in a sports team. You could buy a share of that team and, as the team makes money over years, your stock value goes up. If they have a really bad season and the fans stop coming, your stock value might go down, but that's kind of what stocks are. [13:03.3]

Options are like betting on a particular game, whether that team is going to win or lose that game, or what margin they're going to win or lose by, that kind of thing, and we all know that betting on sports is riskier than being a participant of owning a sports team.

That's kind of how these options work, and a lot of people, when they see the option to buy an option, that can be really attractive to them, really appealing and they actually end up taking more risks than they would have had they not seen that as part of their… They see it as a robot, whereas a human might not have told them that they could do that.

Brandon: Yeah, makes sense. Finally, the biggest danger we see is this idea of gamification. Now, it's in the idea, that whole thing of The Social Dilemma, too. Remember the film on Netflix? [14:00.6]

That's how Facebook is built. That's how all of these social platforms are built and it's how these robo-advisor platforms are built, too. They use robots, and behavioral nudges and push notifications, to draw the investor in and keep them active. I mean, it's on YouTube. It's on all of these things where there are algorithms.

Amanda: Where we're being manipulative, manipulated through the push notification, the behavioral nudges to try to get us to do what the company wants.

Brandon: Yeah, and if the company makes money each time you do a trade by selling that trade data, they build the robots to get you to trade more frequently. Of course, just this year research was published showing what's happening with users of a particular robo-advisor that has mastered gamification. The users of the app traded 40 times as many shares as another platform, and bought and sold 88 times as many risk options, risky options, so they're making a lot more money. [15:10.6]

Amanda: Right, but what's the problem with this, right? What's the problem with trading more frequently? Studies over many years looking at all different kinds of ways people invest in the stock market, not just with robo-advisors but overall, have shown that the more active a person is in trading, the worse their returns are likely to be. Even worse, when that person participates in options, their returns get even worse than when they're just actively trading, and this has been shown not just with robo-advisors, but across the market, in general.

Brandon: It appears the robots’ desire to get you to trade more frequently is directly contradictory to your desire to get your money to make money. [15:57.7]

Amanda: Yeah, so for the savvy listener, we're going to link to this New York Times article in the show notes that has all the gory details, everything outlined here, so you can see how this whole scheme works and even how this whole scheme caused a young 22-year-old to lose his life this past summer.

Brandon: Yeah, that's just interesting, and when I saw that, I was more…

Amanda: Sad.

Brandon: It's sad, yeah.

Amanda: I’s part of why we decided to make this episode.

Brandon: Yeah, because I think that we need to talk about it. Again, I'm not saying you don't do it, but be aware that, hey, we might be being manipulated in some regards.
Now, in their defense, one founder of one of the most successful robo-advisors has said that young Americans risk greater losses by not investing in stocks at all and that not buying stocks contributes to the massive inequality that we see today. [17:00.5]

Amanda: Now, that's a really big claim to make. He's saying that we risk greater losses by not investing in stocks, and if we choose not to participate in the stock market, we're contributing to inequality. Holy cow. I take issue with this. I'm going to get up on my soapbox for a second, and if we look back at history and we look at wealth concentration with the top half a percent or the top 1% of Americans, it shows us a very different story.

I'm going to link, too, this chart I found in the show notes. This chart shows that if you look at wealth concentration of the total wealth of Americans, what percentage does the top 1% have, right? That percentage has decreased from 1913 to the late 1970s. Just overall, it's gone up and down a little bit, but overall decreased. But then, since the late-70s, it has been increasing, meaning, inequality has been growing since the late-70s. The 1% has been having a larger share of the Americans’ total wealth. The wealth has been concentrated in their hands more and more since the late-70s. [18:15.1]

Now, a lot of things happened during the ’70s and from the late-70s to today. There are a lot of moving parts here, but one big change, huge change, is that more and more of the average American, the 99%, we've been investing in the stock market through 401(k)s and brokerage accounts. Before the late-70s, the common wisdom was that only those with money they could afford to lose should buy stocks, almost pretty much the 1%, right, or big corporations, banks, that kind of thing, they should buy stocks. But then it became conventional, putting that in air quotes, “conventional”, that you have to risk in order to get rewards. [18:59.4]

This, what this founder is saying that you risk greater losses by not investing in stocks, it has become, quote-unquote, “conventional”. Of course, pensions have started disappearing and 401(k)s have become the main option for a retirement fund, and those 401(k)s are very heavy and containing stocks, and that's kind of what has driven the growth of the market as well over those decades from 1980 to 2000.
Again, there are a lot of moving parts here. We can't prove causation or correlation. This founder that made this claim, he can't either. We would just say you have to really look into it and not just take this founder's assumption at face value.

Particularly, I think the big reason that people get into stocks and into using robo-advisors is FOMO, fear of missing out, that they do have this fear that other people are going to get in a better place than they are if they don't participate in the same thing. But that also happens with real estate investing and all different kinds of things, that whole fear of missing out. I'm missing out on a great opportunity if I don't do it. [20:09.0]

But I just invite you to ask the question, Could there be some JOMO, some joy of missing out, when it comes to relying very fully on stocks and robo-advisors to manage your wealth for you?
Brandon: And I just want to say before we move on to the conclusion that you don't need a study to see that the inequality and some of that has shifted. I mean, really, we could look around. We can see and oftentimes most of us know there's something that's happening here. We don't need a study to tell us. The studies help, but my question to the audience here is, hey, do you think that something is going on? Do you see that disparity and could we be almost getting played? And wondering, again, hey, it's up to you to make those decisions. [21:06.7]

Amanda: Yeah, it's kind of up to each of us to do the research, look at the disparity, try to find what we believe is the root because of it. Some of those things are ideologies and philosophies like racism, and other times it's what we're doing with our money and how that actually can contribute to racism and vice versa, and we have to look at how the different factors play into each other.

The most important thing is not just to think about it, not just to question those things, but to actually do something different because of what you believe might be the root causes of what you care most about fixing within our world today.

But we should wrap up, get off our soapboxes here.

Brandon: In conclusion, we want to leave you with questions. The jury is still out on the final verdict, but in the meantime, ask yourself these questions as you're thinking about getting into using a robo-advisor in order to invest in the stock market. [22:09.3]

Number 1: are robo-advisors the democratization of the stock market or might they be just another tool to make the rich richer at the expense of those who can't really afford to lose money?

Number 2: are you willing to gamble your hard-earned money, money you can't afford to lose, in an app that only existed a short time and in a model of using stocks that's only been conventional for about 40 years? And that's a question to ask yourself.

Number 3: if you look at your overall portfolio, how much of a place should risky investments take? Should it take 100%, 80%, 20%? That's, again, another question to ask yourself. [23:02.1]

To officially wrap up, Grandma's best words of wisdom here, ask those questions. Do your research and think carefully. If you're going to try a robo-advisor, have a game plan going in. Literally before you start the gamification that they're going to put you on, maybe start a game plan of your own and stick with it, no matter the behavioral nudges and the push notifications, as they're going to try and get you to do more and keep you on that hamster wheel of the game. Maybe even turn off the push notifications.

Amanda: Yeah, and I think that's a great sign I’ll word today. Turn off push notifications. Get some rest, take a break from all the things that are vying for your attention. It's a great time of year to kind of do that reset and turn off all the push notifications, and then only turn back on the ones that you actually miss. [24:05.8]

And then we'll see you in the new year with a great episode about finding certainty in the uncertainty of the year ahead. For now, we hope you and your family, and your loved ones, that you have a happy holiday and a happy new year, and we hope 2021 will be lots of fun.

Brandon: And not a 2020 rerun. We don’t want that either. We love the rhyming. If you want to reach out to us, hey, give us a call, send us a… I like Christmas cards, just saying.

Amanda: I like Christmas cookies.

Brandon: Oh, Christmas [cookies]. If anybody wants to send us cookies, I’ll eat them. Until next time, keep building your wealth simply and sustainably. You can break through to a smart, stable, financial future.

The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.

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