Schedule a Strategy Session Today
The Pitfalls of Target Date Funds, Robo-Advisors, and DIY-ers
If you're an investor with a substantial portfolio, you may be wondering if target date funds or robo-advisors are right for you. While alluring in their simplicity and low costs, both options have considerable downsides for high-net-worth individuals. In this post, we explain the issues you should know and why personalized financial planning is ultimately essential.
The Problem with Target Date Funds:
Target date funds shift toward conservative investments as their named retirement year approaches. This automated, one-size-fits-all allocation isn't ideal because your specific circumstances and risk tolerance may differ greatly from other investors retiring the same year. The target date likely won't align with your unique financial needs and goals. Perhaps it makes sense for one investor, but for another it might be too conservative. This other investor might be better suited to investing in all equities until a few years before his retirement. Additionally, some target date funds have substantially higher internal fund fees versus low-cost index funds.
The Drawbacks of Robo-Advisors and DIY (Do It Yourself-ers):
Robo-advisors have surged in popularity thanks to easy digital access and low fees. But investing isn't as simple as their slick apps make it seem. Robos use algorithms to build and automatically rebalance portfolios, lacking human insight and guidance. In volatile markets, they can't provide the reassurance or help you avoid emotional mistakes that a financial advisor can.
Where might a robo-advisor or an individual DIY investor drop the ball?
- While today's 5% treasury bills may appear attractive with their low risk and high yield returns, there is an opportunity cost. You might miss out on potentially higher returns in the market. As it stands today, the SP500 is up 15% YTD vs a one-year T Bill yielding around 5%. That difference is what you are giving up, although it is not guaranteed. An advisor can walk a client through these potential outcomes, risks, and possibilities.
- CDs vs. T Bills: While a CD and a Treasury bill with identical yields might seem equivalent to an individual investor, after tax, it might not be. CD interest is taxed at the state and local level, while T-bills are not. This can create a much larger after-tax yield for T-Bills.
- Tax planning is another key service an advisor provides. A DIY investor and a robo-advisor might not be able to strategize a Roth conversion so that the investor doesn’t jump into the next tax bracket. And they might not be able to communicate to the investor how making a Roth conversion now, before tax rates go up in 2026, could save them on taxes perhaps 3%. That might not sound like a lot, but 3% on a $50,000 conversion is savings of $1,500.
- A large part of the value proposition of a trained financial advisor is helping a client a) avoid costly mistakes during a volatile market (selling) and b) securing major gains and tax savings by utilizing planning strategies available to them that otherwise they would miss, and c) strengthening retirement income and long term growth through a combination of portfolio management and planning strategies.
In the end, investing and retirement planning are deeply personal because of the uniqueness of each investor and retiree - and that’s part of the reason why it is such a relationship business. Target date funds and robo-advisors take a one-size-fits-all approach that simply can't replicate the customized guidance from an advisor who understands your specific financial life and goals. While investing may look easy on Tik Tok, Instagram, or Investopedia, real life is always more nuanced. Everyone has different goals, risk appetites, and time horizons. Everyone has different family relationships, different incomes, expenses, assets, and liabilities. Everyone has a different understanding of the markets. For high-net-worth individuals especially, personalized financial planning is essential.