Are Robo-Advisors the Enemy? With Jon Stein from Betterment

Robo Advisors

This week, the Money-Guys have brought on special guest Jon Stein, CEO of Betterment, to pick his brain about the robo-advisor industry.

While it might seem strange to have a “competitor” on, Jon and Brian had similar reasons for starting their businesses: to provide financial services to those who need it most in an accessible way.

Jon doesn’t view Betterment as an enemy to advisors, either. He sees it as a complement to what advisors are already offering. That’s why, since the beginning of the year, Betterment has offered institutional services to financial advisors.

Beyond that, most of Betterment’s clients are DIY investors — and only 17% of users logged in this past weekend amidst all the market volatility. Jon attributes this to the fact that Betterment clients know better. They’re in it for the long-haul and have accepted the ups and downs for what they are.

The Future of the Financial Advice Industry

Brian and Bo enjoyed getting Jon’s insights about the importance of technology and what the future of robo-advising is as well. Betterment has become a leader in the industry because of its focus on technology and clients. User experience is something Jon takes seriously — Betterment aims to provide fast service in every aspect of the process.

Brian agrees with this approach, saying keeping the client happy should be every advisors biggest concern, especially with the level of competition these days. Brian argues virtual advisors are an even bigger threat to traditional advisory firms than robo-advisors are.

How Betterment Offers More Than Technology

Speaking of traditional firms, when asked about Betterment’s competitive advantage, Jon remarks that technology and diversity are what sets its services apart. While everyone is a big fan of Vanguard, it’s known for its low-cost index funds.

It’s not known for advice (or friendly user experience). Betterment doesn’t manufacture funds, and is better suited to giving objective advice about investments than the bigger brokerage firms.

Betterment is also the only true robo-advisor that offers complete automation for clients. Advice is given automatically based on searches or questions users have, and portfolios are managed without users having to lift a finger. This allows for a better user experience, and it’s no surprise Betterment has the lion’s share of users out of all the other “robo-advisors” out there.

What’s the biggest risk Jon’s concerned about? The availability of talent. Betterment has assembled a great team, but as the company continues to grow, Jon hopes he can hire the “right kind of people.”

Whether or not you’re keeping up with the evolution of robo-advisors, all financial advisors can take away some key points from this podcast. Jon is a wealth of knowledge when it comes to the business, and Betterment isn’t going anywhere anytime soon.

If you enjoyed this show, don’t miss out on the full library of content from The Money Guys. Click here to learn more and join the community!

How to Avoid Cognitive Investing Biases on the Road to Financial Independence

Cognitive Investment Biases

In celebration of Independence Day, your Money Guys are talking about how our emotions can interfere with achieving financial independence.

We all know that being invested in the stock market puts our money at risk, which can cause a roller coaster of emotions at times. When the market is up, we’re happy, and when it’s down, we’re depressed and anxious.

Letting your emotions influence your financial decisions, especially when it comes to your investments, is a bad idea. How can we push our emotions aside so they don’t cause us to make grave mistakes with our portfolio?

Brian and Bo give you the answers in this episode, and discuss 15 cognitive investing biases to avoid on the road to financial independence.

Don’t Let Your Brain Hold You Back When it Comes to Money

Rick Edelman’s book, “The Truth About Money,” reviews the cognitive biases investors are most at risk for, and Brian goes through each in detail. He provides insightful examples so you can recognize when your emotions might be controlling your investment decisions.

The first step in being able to avoid these biases is to simply be aware of them. All too often, we get caught up in our thoughts and rationality goes out the window. You don’t want to play around with your emotions or your money, especially when it comes to growing your wealth to reach financial independence.

Here are 15 cognitive biases to stay away from as an investor.

 

  • Intuition Bias: Do you rely on your gut to make investment decisions? It goes without saying that’s a big mistake!
  • Mental Accounting Bias: This is when we treat our money differently depending on where we’ve mentally allocated it.
  • Compartmentalizing Bias: If you have multiple investment accounts, are you factoring in the investments you’re holding in all of them when figuring out what to invest in? Or are you viewing each as a separate account? You shouldn’t compartmentalize your investments.
  • Pattern Recognition Bias: Many of us are guilty of seeking out patterns that don’t exist. This is why “past performance does not guarantee future results” exists.
  • Recency Bias: We have a tendency to focus on current events, and this might cause us to base future predictions on how the present is going.
  • Proud Papa Bias: This occurs when we fall in love with our investments, or when we have a personal interest in seeing a stock do well.
  • Optimism Bias: This is when we think bad things only happen to others – not us – which causes us to be overconfident in our investments and to underestimate risks.
  • Illusion of Control Bias: If you think your actions control events, you’re guilty of this one. Just because you purchase a stock doesn’t mean it will perform well.
  • Pessimism Bias: The opposite of optimism bias, this is when we second-guess all of our investment decisions and can’t take action.
  • Catastrophe Bias: A combination of the recency and pessimism biases, this occurs when we think another recession is just around the corner, and hold ourselves back from entering the market because of that belief.
  • Regret Aversion Bias: Have you ever made such a bad mistake, you take every measure you can to avoid making it again? This limits your opportunity, especially with your money.
  • Endowment Bias: This is when you overinflate the value of your investments, similar to how homeowners often think their home is worth more than it actually is.
  • Herd Mentality Bias: So many investors are guilty of going with the herd on investments, whether it’s with friends, coworkers, or the media.
  • Anchor Bias: This can happen when the price of a stock shoots up or down, and an investor makes a decision to buy based on what the previous and current price is. They’re not valuing the price correctly because they’re anchoring to the higher price.
  • Illusion of Attention Bias: This is prone to happening when you invest in individual stocks, and focus all your attention on how they’re performing. This distracts you from the total performance of your portfolio.

In short, don’t fall prey to your emotions. They won’t guide you to road that leads to financial independence. Instead, base your investment decisions on sound principles, thoroughly research your options, make use of reputable resources, consult with your financial advisor, and don’t forget to enjoy life along the way.

Money is a tool to accomplish what you want in life, but don’t let the market influence your emotions to the point of being miserable.

The Serious Impact of Investment Fees

InvestmentFees

Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?