Open enrollment certainly isn’t over, but I got a piece of mail today that I wanted to address. The 403b I currently contribute to encourages (but does not force) the use of a computer managing my account, for a fee of course. In usual advertising speak it’s made to sound really cheap: There’s no cost at first, and the cost caps out instead of continuing to climb. But how much does “cheap” actually cost, and what do I get for that? As I constantly tell my kids as they’re learning about advertising, “look out, it’s a trap!” Now, if you know what it costs, and you think it’s worth it to you, then of course it’s fine if you want to pay that (I’ve got a mini-fleet of kayaks and canoes plus a stand up paddleboard at my house, ~2x times the number of boats than there are people, I certainly can’t claim I don’t pay for what I value).

These types of automated account management services, run by computers, are commonly referred to as roboadvisors. What do you typically get for these types of account management services?

In retirement accounts, some sort of risk assessment, allocation of incoming money into a set of investment options that were selected for you based on your risk assessment plus age, and rebalancing. They may or may not allow you to every couple of years have a 1 hour meeting with a stranger who can see the answers to what you answered for the risk assessment. We’ll leave out the issue of what types and quality of funds they put you in, as that varies.

From the providers of these types of services in regular taxable accounts, there usually isn’t a real live stranger to get to get advice from included in that cost. Instead, the additional provided benefit of tax loss harvesting is touted. Don’t get me wrong, tax loss harvesting can be useful, but it’s only really ever applicable on recently invested funds due to long term market gains (and being a long term buy-and-hold investor), whereas the fees are forever.

Now that we know what we’re getting, what does that cost? Here’s from the mailing I received today, I converted their words of account balances, and fee percentage per year into a more illustrative table to shine some light on total annual cost:

For fun I went looking for some other numbers. When I looked today, Wealthfront and Betterment (two popular roboadvisors) charged a flat 0.25% on all assets in their accounts. To make it comparable, I created a table with the same layout. They don’t have a cap, so since taxable accounts can be jointly owned and don’t have annual contribution limits, I threw $10M on there as the upper end for fun and to show you my math worked as-expected (error-checking). Here’s what we get:

Those fees are paid from the account (no option to pay them by check from your cash funds), which you can think of as effectively reducing what you were able to have contributed this year. For those able to fully contribute to the maximum annual limit in a retirement account ($6k for an IRA, $19k for a 403b/401k in 2019, higher if you’re older), that’s especially mentally painful when it reduces the benefits of your tax-incentivized investment.

Don’t forget, this is per account. So if you’re a family with two working adults, paying for computerized account management on 2 IRAs and 2 403bs (or 2 401ks), with $100k, $100k, $500k and $500k. Under these two cost structures, that’s $285+285+760+760=$2090, or $250+250+1250+1250=$3000.
[To make this experiment even more painful, think about adding two 457’s and a taxable account. Or having higher account balances.]

Is that kind of money, annually, on a roboadvisor a good value to you given what you’re getting from it? Spending that kind of money on your money, in the form of working with a fiduciary comprehensive financial planner, sounds like a lot better value now, doesn’t it?