There’s a new fad going on in the investing world- automated online investing services. The biggest one you likely have heard of (or seen advertised) is Betterment. There are a couple others; like Wealthfront, Future Adviser or Personal Capital. The premise behind these services is that most of us don’t need fancy, expensive financial advisers that’ll take 1-2% of your assets each year in fees for managing your money. These new online services work off of the idea that investing can be done in a methodical, formulaic and cost effective manner. Their fees are more like 0.15%, which is certainly more affordable. Should young professionals like ourselves invest our money in such a service? We all know that we need to invest, and unfortunately, a lot of us aren’t sure how. On first glance, using a site like Betterment certainly sounds like a smart idea. However, I think that the reasons that make an online site like this so attractive also leads to the conclusion that they aren’t really necessary.

The pros

These new online services take away one of the major barriers that keep young investors out of the market: ignorance. Getting into the market is tricky. Once you’ve created an account and logged in, there are an overwhelming number of mutual funds/stocks/efts for you to invest in.  Even the smartest among us can get overwhelmed to the point of frustration and quitting. That’s the point of paying someone to manage your money; they a) invest it and b) invest it in a smart manner. However, paying someone can get expensive and this is where the online services have an edge. Betterment charges 0.15%. That’s way less than the 1-2% a financial adviser would charge you. Online advisers also advocate that their investing methods are superiors, focusing on tax efficient, low cost investments, like ETFs. By investing with them, you’ll supposedly get the best bang for you buck. Truth be told, I’m not convinced by their superior investing methods, but I do like that they’ll cheaply get you invested in the market.

The secret sauce that isn’t so secret

If you are getting closer to retirement, then sure, a financial adviser could be helpful. There will be special tax considerations to take into account and you’ll want to make sure you dot your I’s and cross your T’s. Or if you’re a millionaire, then you probably should hire someone to help out. For the rest of us, it’s honestly not that difficult to get invested in the market. I’m convinced more and more that all you really need is a good index fund. That’s right, despite my best efforts to convince myself that I’m a good investor or that I can pick a mutual fund better than you, I’ve learned that honestly an index fund is the way to go. The stock market is a giant hairy animal. You could be a phenomenal lion trainer but you never know when the lion will disregard your rules and do its own thing.  Even a stock picked on sound logic can go down with the rest of the market, or go down for a silly reason. In the game of investing, it’s probably best to play it safe with an index fund, which owns between 100-200 stocks, and tries to be a good representation of the overall market.

The reality of sites like Betterment

If you read on their website or even invest with them, you’ll realize that basically all they do is invest in the same index funds that you could invest in on your own, without them. Sure they’ll have a ‘proprietary blend’ of index funds that they will put your money in, and various algorithms to trade in and out of these funds, but honestly I’m not sure how worthwhile these services really are. I think that you could get similar results investing a fixed amount of money in an index fund every month, all without paying some online broker 0.15%. The secret to getting rich is to maximize returns while minimizing expenses, so even cutting 0.15% is a good start!

Although online trading sites are quite attractive to young investors like us, I think that with a little work on our part and the diligence to keep investing, you could achieve similar results, without the cost! Go ahead and see about setting up an online brokerage account at Vanguard, Scottrade or Fidelity, and try to start investing in your own!

Let me know your thoughts! Have you had a good experience with Betterment that you’d like to share? Also, a good article from our friends over at Mr. Money Mustache on index funds is what helped convince me on the low-stress, low-complexity investing model. 

Finally, I enjoy sharing the love to other financial bloggers when I read a good article, and here’s one about saving money at CVS from my friend Kelli at the Penny Hoarder. Give it a read!