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Choose a great investment advisor: Human vs. Robo

Updated: Jun 28, 2023

The right investment advisor can maximize long-term value

What is the value of a personal financial advisor (or a PFA)? These are advisors with significant education and experience in finance, investment products, and portfolio management. They work with their clients to make optimized decision recommendations for your long-term financial health. Recently, the value of the PFA has come into question. With low-cost ETF and mutual fund firms coming into vogue, like BlackRock and Vanguard, one can maintain a passive approach to investing without paying higher PFA fees. A PFA will charge about 1.25% of Assets Under Management and that is after the cost of administering the underlying funds they manage. Also, PFAs often have minimums that make it hard to get started with a PFA until you have already built some wealth. A bit of a "chicken or egg" problem.

A good PFA does a few things very well [i] that a low-cost passive fund cannot.

  1. They create "set it, and forget it" investment strategies. These are sensible, risk-based strategies that rely on automatic payments and payroll deductions to ensure proper and consistent investment funding. Even when the market is choppy, these automated mechanisms fire to buy low and help manage down your basis in market corrections. This consistent funding approach helps build long-term wealth.

  2. They automatically rebalance portfolios across multiple fund types to maintain your long-term investment risk tolerance. Over time, funds will grow at different speeds, so periodic rebalancing is important to maintain your risk strategy.

  3. They manage your fund strategy in a way that optimizes your tax liability. The Tax Loss Harvesting approach swaps similar funds at the appropriate time. This approach purposefully reduces your tax liability and improves your after-tax yield.

Could you do this yourself? Yes, but it would take a decent amount of a) technical understanding, b) self-discipline to overcome the fear when markets decline, and c) the desire to regularly balance trade mutual funds and ETFs. Also, there is a risk that you miss a key trade or otherwise become occupied with other pressing matters. It would be really great if there was a lower-cost way to automate the PFA's "3 key things" at a lower cost and without those annoying minimum investment requirements. Well, you are in luck! There is another solution. That is called a Robo-advisor.

In our article Budgeting like a stoic, we discuss how Robo-advisors work and we reference Robo-advisor companies we have previously used. In this article, we focus on the Robo-advisor's much higher long-term value in the context of the Stoic’s Arbitrage. [ii] The Robo-advisor has higher long-term value because its costs are significantly lower. The PFA cost can be 1.25% of assets, whereas the Robo-advisor cost is around .25%. A 1% difference may not seem like very much, but as we will show below, it can be worth many $millions over your life. The problem is, people do not really think in terms of percentages or naturally understand the time value of money. Our brain has no way to ground 1% as a meaningful number plus the exponential functions associated with the time value of money are not naturally intuitive. But this is where the Stoic's Arbitrage thinking comes into play. It is important to educate yourself and take actions to impact the long term. This could mean projecting decades in the future to your retirement or even multi-generationally.

Let's use an example, let's say you are like Liam from our article They kept asking about what I wanted to do with my life, but what if I don't know? Liam is in his 20s and recently graduated from college. He is ok with some career uncertainty and works for a company in a high-growth industry. Also, Liam was able to graduate with little or no college debt. After he sets aside money in his company 401(k), he still has some money left over to invest in a taxable account. Liam is consistent and able to increase his taxable account distribution every year. Also, he periodically makes and maintains a few bigger annual increases. The following table shows his ability to invest in a taxable account.

By consistently investing over a 45-year career, Liam's investment outcome at age 67 is north of $20 million! Please see the attached excel spreadsheet for the model. This is our contribution to inform your stoic's mindset.

The key drivers are:

  1. He started young,

  2. He did not have significant student loan debt,

  3. He worked in a growth industry and was not afraid to periodically change companies.

  4. He was consistent in his contributions and financial discipline, along the lines of the "3 key things" discussed earlier.

So, if a PFA and a Robo-advisor can both do these "3 key things" equally well, what is the value of using the less expensive Robo-advisor? In Liam's case, the Robo-advisor approach is worth $6.3 million at retirement! To be clear, Liam will receive over $6 million more at retirement simply by using a Robo-advisor instead of a PFA. This is an example of the Stoic’s Arbitrage in action.

You can see why PFA's market their costs as obscure-sounding percentages instead of long-term value opportunity costs.

A PFA saying:

"Come work with me, I only cost 1.25% of assets and you will never have to write me a check!"

is a very different marketing message than:

"Come work with me, I will cost you over $6 million at retirement!"

By the way, this marketing focus on obscure percentages instead of more meaningful dollars is based on the well-researched psychological principle called the “Affect Heuristic.” The affect heuristic is when subjective impressions of goodness/badness act as a heuristic - a source of fast, perceptual judgments. [iii] Pleasant and unpleasant feelings are central to human reasoning, and the affect heuristic comes with some naturally occurring biases. For example, low percentages are interpreted as far less “bad” than higher absolute dollars. Investment management product marketers know this. Counteracting the affect heuristic is one of the key benefits of using the Stoic’s Arbitrage framework.

See the following graphic to understand how the value difference grows over time:

You may be wondering, what if you have a college loan and are not as comfortable with changing companies as Liam? As such, your situation is more like Bob's. Bob has student loans, so he can not start taxable account investing until he is 30. Also, he does not change jobs as often, so his escalators are smaller than Liam's. Even so, investing using a lower-cost Robo-advisor is still meaningful. In Bob's case, the arbitrage is worth $1.8 million at retirement! Still very worthwhile!

The following are some notable stoic-based rules of thumb:

  1. Start as young as you can. Even small amounts of money invested when you are younger can be worth many multiples at retirement. The time value of money is powerful! [iv]

  2. The "3 key things" discipline is important to maintain for decades. Consistency is important.

  3. Managing down college costs is critical. Unfortunately, there is significant misinformation floating around about "College as an investment." Please see our article The College Decision: Proceed at your own risk for more information.

The Stoic's Arbitrage is a long-term value creation approach that can be worth many $millions. Whether you are picking investment advisors, choosing a college, or buying a car, thinking and acting like a stoic is a powerful way to create value for yourself and the people you love.

Liam Arbitrage between PFA and Robo
Download XLSX • 29KB


[i] A PFA may claim they can beat the market. There is a tremendous amount of literature that suggests this is simply not true. But, even if they could, then they certainly would not be working as a PFA and chasing your business. They would be a mega-billionaire living on an island.

[ii] In our article, The Stoic’s Arbitrage: A survival guide for modern consumer finance products we provide the conceptual background for The Stoic's Arbitrage and how it relates to this article.

[iii] "The Affect Heuristic in Judgments of Risks and Benefits" studied how subjects mixed up their judgments of the possible benefits of a product and the possible risks of that product, into a single overall good or bad feeling about the product. It is a good introduction for the Affect Heuristic and how it may impact financial product marketing.

Finucane et al., The Affect Heuristic in Judgments of Risks and Benefits, Journal of Behavioral Decision Making, 13, no. 1 (2000): 1-17.

[iv] See our article The Time Value of Money Benefits the Young for more information.


The Stoic's Arbitrage: Your Personal Finance Journey Guide

Core Concepts

Making the money!

Spending the money!

10. Budgeting - Budgeting like a stoic

14. College choice - College Success!

Investing the money!

Pulling it together!


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