What do you need ? – Councilor Forbes

The decision to put money aside today for retirement years from now is a very big demand. But then comes the hardest part: figuring out how to invest that money.

“Most people don’t want to be their own financial advisor,” says Stan Milovancev, executive vice president of CBIZ Retirement Plan Services. “Even if they want to, they must be able to understand the theory of investing and have the courage to stick to it.”

Because they handle all the choice and management of investments, a target date fund or robot advisor can be a smart and easy solution. But what exactly are they and how do you determine which one is best for you?

What is a robot advisor?

As the name suggests, a robo-advisor is an automated investment advisor. After asking you a bunch of questions about your financial life and investment goals, its algorithm spits out a recommended mix of investments.

This asset allocation is typically made up of low-cost exchange-traded funds, or ETFs, which contain hundreds or thousands of individual stocks or bonds. This allows for easy diversification of your investment dollars and is in line with what most financial advisors recommend for a successful long-term retirement investment.

Of course, these investments and their maintenance are not free. There are usually two fees that you pay when you invest through a robo-advisor.

Most robotics advisers charge what is known as an advisory fee for managing your account. A recent survey of 17 robo-advisers set the average annual fee at 0.30%.

Then there is the annual expense ratio charged by the investments the robo-advisor places you in. The cheapest ETFs and index mutual funds may have expense ratios of less than about 0.10%. This means that your overall cost of investing through a robo-advisor can typically be less than 0.50% of the assets you own each year.

What is a target date fund?

A target date fund is a lot like a robo-advisor in that it is a one-stop-shop solution to building an instant diversified portfolio.

Although you take a quiz to determine your investments with a robo-advisor, target date funds are much simpler, offering the same diversified asset allocation strategy for everyone by number of years as they have it left before they reach retirement age.

When you are young, a maturity fund adopts a more aggressive strategy with a higher percentage of equity investments. But as retirement approaches, he adjusts his holdings to become more conservative with his holdings, so you’re less likely to ruin your retirement plans if something cataclysmic happens in the stock market.

Because this is a fund that holds many other funds, a target date fund is called a fund of funds in the investment world. In addition to standard equity and bond funds, some maturity funds also invest in real estate and commodities funds.

As with robo-advisers, investors pay an annual expense ratio that reflects the fees charged by each of the underlying funds in the portfolio. According to Morningstar’s annual target date report, the asset-weighted average expense ratio for target date funds is 0.52%. The cheapest target date funds have an average fee of 0.12%

Differences between a Robo-Advisor and a target date fund

While both approaches offer a streamlined approach to retirement investing, there are some important differences to consider when considering robo-advisers and target date funds.

Customization level

Essentially, a target date fund asks you a question: How old are you? The wallet that you are guided in is the same that everyone of the same age will have, although your financial situation may be very different.

“A robo-advisor starts with your age, then asks a lot more questions, such as how much you’ve already saved and your income level,” says Milovancev. “A robot is not as personalized as working with a financial advisor, but it is much more personalized than investing in a maturity fund.”

While target date funds are designed for retirement savings, a robo-advisor can also create portfolios to help you meet other goals, like saving for a down payment or a child’s school fees. For this non-retirement savings, you will use a regular investment account that does not enjoy the tax benefits of a retirement account.

But for this reason, many robot advisers are able to offer a service called tax loss harvesting that takes advantage of the fact that even though you are taxed on the gains, you can write off the losses. Over time, this can improve your investment returns in taxable accounts.

Investment universe

Target date funds typically use mutual funds managed by the same company. For example, BlackRock target date funds own BlackRock funds. Fidelity Target Date Funds own Fidelity mutual funds. “It can be very good,” says Milovancev. “But they only shop at their grocery store.”

Meanwhile, robo advisers who are not affiliated with a fund company, like Betterment and Wealthfront, have the freedom to research the best investment options for their client portfolios. This can help you get lower fees, more cash, or even better prices on your investments.

Investment approach

Robo-advisers typically only use index ETFs or index mutual funds that simply attempt to recreate the performance of major indices, like the S&P 500 or the Nasdaq. Because there are no regular decisions made about what to invest in, this is called passive investing and contrasts with so-called active investing in which each investment is chosen by a professional.

Some target date funds use actively managed funds, some are 100% committed to indexing like most bots, and some even use a combination of the two. Target date funds that use a certain amount of actively managed funds generally tend to have higher expense ratios than fully passively managed funds. This can reduce your returns on investment over time.

Cost

A target date fund with a low expense ratio will typically cost you less than the all-in cost of a robot advisor, where you pay an advisory fee plus the expense ratio. That said, if you go with a target date fund that includes actively managed funds, you might find yourself paying a higher expense ratio than the all-in cost of a robo-advisor.

While you shouldn’t necessarily run the other way around with higher fees, keep in mind that, on average, actively managed funds perform worse than passively managed index funds. This means that you could end up paying more for the same or worse performance.

Finally, when looking for robot advisers, there is another important factor to consider when it comes to cost. Some bots will tell you that there is no consulting fee. But there is usually an important asterisk that you don’t want to miss.

Schwab’s robot offering, for example, doesn’t charge an advisory fee, but the algorithm it uses to determine your asset allocation will still insist that you hold money (it can range from 6 % to 29% depending on your investment objective) and that the cash will be held in Schwab’s own bank. This means that Schwab is free to lend your money as it would any other money held in savings accounts. This helps him pay for his “free” consulting services, but it can cost you returns that you miss because not all of your money is invested.

Other robots, like SoFi Automated Investing, cover the cost of their “free” services by investing you in a certain amount of proprietary funds they own that may have higher expense ratios than comparable investments. on the long term.

The important thing to remember is that there really isn’t a free robo-advisor. Each brokerage must ultimately charge enough to at least cover the cost of the service, even if these fees are hidden.

Minimum investment

It’s hard to outline when it comes to the minimum you need to invest with a target date fund or robo-advisor. You can find platforms and products that require little or no money to start, and others, like Personal Capital, that cost over $ 100,000.

That said, generally speaking, since most target date funds are mutual funds, they tend to have higher minimum investment requirements. For example, it takes $ 1,000 to start with a target date fund at low-cost leader Vanguard. But funds with no minimum target date exist. Schwab’s target date funds, for example, have a minimum investment of $ 1 for retirement accounts, and you may be able to bypass minimums at some brokerage firms by agreeing to regularly invest a set amount.

Robo-advisers generally have lower initial hurdles: for example, Betterment has no initial minimum and Wealthfront is $ 500. But the robots of traditional brokerage houses, like Vanguard and Schwab, may have minimums that exceed their target date fund counterparts.

In short, when deciding between saving for retirement with a maturity fund or a robo-advisor, keep in mind that different products have different minimums that can affect your ability to invest immediately. But with a little research, you should be able to find a robot or target date fund that meets your needs.

Should you invest with a target date fund or a robo-advisor?

If you are investing as part of a workplace retirement plan, the decision to use a target date fund or robot advisor is for you: – date funds, not robots.

But if you’re ready to do a 401 (k) rollover or want to build retirement savings into an Individual Retirement Account (IRA), you can go either approach to make your life easier. investor.

If you’re ok with a perfectly usable (but cookie-cutter) approach that may charge less fees, go for a target date fund. If you are hungry for an asset allocation that is more suited to certain basic elements of your personal financial life (savings, income, etc.) or if you need to invest for something outside of retirement, a robot advisor is the solution. . And for a more personalized approach than a robot, you’ll need to enter the world of work with a financial advisor.