Target funds vary in their management style. A conglomeration of actively managed, passively managed, and combination strategies exist. Actively managed funds have at a higher expense ratio (average 0.68%) compared to a passively managed fund (0.06%). Actively managed funds may have increased return opportunities in certain market conditions, but they come at an increased management strategy cost. If the goal of fund allocation is diversification and asset balancing, utilizing an actively managed target fund may be more economical than working with a financial advisor who typically bills at a rate of 1-1.5%.
Target funds are designed as a one-size-fits-all approach for the average investor, sothey may not meet the needs of specific situations and may not be the best option for all people. Additionally, target funds may restrict investment choices and decisions by limiting fund allocation within the target fund.
Robo-advisors offer another management strategy for retirement and wealth accumulation. The specific algorithms of robo-advisors vary with each firm. The largest current robo-advisor firm by assets managed is Vanguard Digital Advisor. Other large firms to offer these services include Charles Schwab, Betterment, and SoFi. The gist of the robo-advisor service is that personal goals and preferences are evaluated in conjunction with factors to include risk tolerance, age, income, and current savings through a questionnaire. This information is entered into an algorithm to curate an individualized portfolio of funds. The robo-advisor monitors and rebalances the portfolio over time. The interval of portfolio fund reallocation varies between robo-advisors. Some firms offer live consultant options in conjunction with their robo-advising.
The types of fees levied for robo-advisors varies with each firm. Robo-advising services typically charge two types of fees. The first is a management fee which is a percent of managed assets on an annual basis and ranges from 0-0.35%. Other fees associated with robo-advisors include investment expenses. If the robo-advisor choses to invest into funds with an expense ratio these costs are then passed along to the consumer. These fees range from 0.03-0.09%.
Some robo-advisors additionally offer tax-loss harvesting as a benefit. With tax loss harvesting, the robo-advisor will sell investments that have declined in value helping to offset the capital gains experienced that year. This is most important in large accounts or for those in a high tax bracket. This only applies to taxable accounts and will not apply to the IRA.
Robo-advisor services often require lower opening balances and minimum deposit requirements compared with live advisors, but some require minimums of $1000 or more. Regarding fees, they are typically less expensive than live financial planners. Robo-advisors may not be helpful in complex situations such as with estate planning or college savings funds. Some robo-advisors offer varying access to live financial advisors which may be helpful in these situations but may be subject to additional fees or only available with premium accounts.
If you do choose to manage your finances yourself, you don’t have to go at it alone; there are many tools available to help you take charge of your financial future.
The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.