Welcome to another episode of Financially Well, the finance podcast for Millennials. I want to share a detail about my own money management today: I don’t use any fintech apps to invest.
If you’re currently thinking about where to invest, I want to discuss a common decision point for many Millennials: whether to use robo advisors (often with fintech apps included) or stick with a more traditional approach. I’ll frame the debate as Betterment vs Vanguard. Or, in other words, the longest-standing independent robo advisor against the long-time leader in low-cost investing.
When I want to invest, I open my laptop and log onto Vanguard, with whom I invest almost all of our family’s money. The primary reason is that Vanguard, through its late founder Jack Bogle, pioneered the low-cost index fund. Essentially, Vanguard created access for you and me to diverse, inexpensive investment options.
In addition, as Investopedia writes:
“Vanguard has a fairly unique structure in terms of investment management companies. The company is owned by its funds. The company’s different funds are then owned by the shareholders. Thus, the shareholders (like me, and perhaps you) are the true owners of Vanguard. The company has no outside investors other than its shareholders. Most of the major investment firms are publicly traded.”
So I’ve appreciated over the years that Vanguard’s incentives align with mine at least slightly more than my alternative options.
Should you also invest your money with Vanguard then? You certainly could do far worse for yourself and your money. But Vanguard isn’t perfect. And that reality becomes more important to consider as companies like Betterment increasingly offer robo advisor services and slick fintech apps.
In May, Dr. James M. Dahle, who founded the White Coat Investor blog, asked in a post whether Vanguard has “lost its way.” He highlighted four issues that Vanguard critics point to as indications that Vanguard has regressed:
Dahle explains why, for the most part, none of these arguments should cause investors like us much concern:
This last point ties in well with how you might think about where you invest your money. As Vanguard’s relatively new offering indicates, even the largest investment platforms now try to pitch some form of robo advisor service.. But when should you embrace an automated investment service, particularly on mobile fintech apps?
Let’s start with a definition and a quick overview. As CNBC wrote earlier this year:
Robo advisors “aren’t actually tangible robots; they’re algorithms companies have developed to automate digital investing. Plug some details (age, savings goals, risk comfort) into a computer or phone app and the algorithm assembles and manages a personalized investment portfolio just for you.
They include independent shops like Betterment, Personal Capital and Wealthfront (recently acquired by UBS, though); traditional Wall Street brokerages like Fidelity Investments, Merrill Lynch and Morgan Stanley; and those like Financial Engines that cater to 401(k) plan investors.”
Ultimately, Business Insider concluded, “a robo advisor is really more of an investment tool than a resource.”
I want to stress that, overall, fintech apps that provide investment services have benefited millions of people. Simply put, they’ve made the stock market more accessible. They typically offer a lower barrier to entry to investors. So people who want to grow their wealth, but have felt intimidated by or shut out of the stock market, now may feel more confident and welcome. Their slick, modern interfaces appeal to investment novices more than most traditional investment websites. And they’re often easier to navigate.
So when you need to make a decision about where to invest – Betterment vs Vanguard, for example – how should you choose?
Robo advisors can be a strong option for three groups of people, in particular:
The benefits for people who fall into these categories revolve around the investment portfolios that most robo advisors offer. The fintech apps that include robo advisor services often first ask you to answer a few questions about your investment goals and risk tolerance. Then, if you select their “recommended” portfolio, you’re likely investing in low-cost, diversified index funds. In fact, as you compare different robo advisors, investment performance isn’t much at stake, since many of their offerings are so similar.
If you’ve never invested before, this is a great starting point. And if you have no interest in managing your own investments, the robo advisor essentially can take on that burden for you. Finally, if you don’t intend on putting together a financial plan for your life, a robo advisor can help to make sure you’re not making major investment mistakes.
“The takeout food business is not the model on which I want to base my approach to building wealth.”
Even so, you shouldn’t view any fintech apps as benevolent forces that always have your best financial interests in mind. You don’t want to blindly trust a robo advisor with your money, even if you appreciate their technology and targeted marketing.
Here are a few situations, which CNBC detailed in their January 2022 article, in which you might start incurring unnecessary investment costs:
Higher investment expenses aren’t your only risk with some fintech apps, though. Many young investors, for example, previously fell prey to Robinhood’s “gamification” of investing. As UC Berkeley’s Kathleen Pender described in early 2021, “The Robinhood app makes investing fun and — critics say — addictive. New members get a free share of stock after they scratch off the image of a lottery ticket, and when they reach certain milestones, digital confetti rains down on their screen.”
Fintech apps that present investing as a game can lead some investors to make incredible risky decisions that they don’t fully understand. In addition to certain complex investment strategies that some platforms offer, a robo advisor can’t sufficiently address the emotional and psychological elements of investing. Critical questions such as, “What scares you about putting your savings in the stock market?” don’t factor into a fintech app’s one-click investment option.
Most recently, the Wall Street Journal’s Jason Zweig reported on the vague and potentially misleading promises that certain fintech apps make in their marketing materials. He wrote specifically about companies that promise savings accounts with higher interest rates:
“Before you grab what sounds like a tempting yield, make sure you take a closer look. …Fintech companies aren’t always banks and don’t always have to follow the same rules banks do. Their disclosures and marketing can make high yields sound like more of a cinch than they are. …At most of them, though, you must maintain specific account sizes, hit spending targets, or do business with affiliated companies.”
Don’t get me wrong: the easy, slick interfaces that robo advisors offer appeal to me, too. And I’m just as vulnerable to clever marketing as anyone else. But ultimately, I don’t want to spend any more time than necessary in my investment accounts.
Rather, I want to think through my investment strategy in advance. I want to set up frequent, automatic contributions into as many of my different investment accounts as possible. And when I unexpectedly have extra savings to invest, I want to already have a plan for where exactly that money will go.
So I don’t ever really want or need fintech apps on my phone, particularly for robo advisor services.
When I hear a robo advisor representative – in this case, Wealthfront spokeswoman Elly Stolnitz – say, “[Our users] want to be able to manage money the same way they manage other things, like [online food delivery via] DoorDash,” I immediately recognize a disconnect with my own investment goals. The takeout food business is not the model on which I want to base my approach to building wealth.
So for the indefinite future, I’ll stick with Vanguard. And I’ll gladly accept their low costs in exchange for mediocre technology.
Thanks for listening to the Financially Well podcast. If you liked this episode, I’d be honored for you to share a link to this post with your friends and colleagues.
[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]
Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.
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