For many of us, achieving our financial goals and reaching financial independence is a life-long ambition. Our greatest shot at it is proper financial management and to get started investing today. If you haven’t yet invested, there is no better time than now. But where to begin? Well, before investing a single dollar, you must decide which approach is right for you. You have 3 options – A Self-Directed Portfolio vs. a Financial Advisor vs. a Robo-Advisor. We take a close look at all 3 approaches below, the pros and cons of each and how you can find the one that’s right for you.
At Wealthplicity, we vote for managing your own portfolio. The advantages that come with learning how to invest and managing your own investment decisions is numerous. At the same time, maybe now isn’t the right time for you to start your managing your own portfolio. While it’s certainly one of the most important steps you can take, it’s a big commitment, and life can often get in the way. A lot of us have work, families, little league, soccer practice, or your wife wants to take you to a bread making workshop.
At the end of the day, you may decide that there is just too much going on in your life to add another focus. And that’s ok, because you have other options that will help you get started investing.
Which approach you choose entirely depends on your life situation. But the good news is, no matter which route you go, you can still invest in the markets.
Self-Directed investing is when you manage all the money and decisions in your investing portfolio. This approach used to be unheard of. In fact, it wasn’t until the last few decades that we began to see the growth of the individual investor. Something like 15 million new investors entered the market since the beginning of 2020. That growth is unheard of but not surprising.
The rise of financial technology or fintech has given the masses instant accessibility to information on investing that they never had in the past. On top of that, new investing platforms have given retail investors incredible new features that incentivizes their participation.
But even with the massive amount of growth, there can still be drawbacks in managing your own portfolio.
So let’s take a look at some of the pros and cons of managing your own portfolio:
So, now that we have taken a look at self-directed portfolio, let’s look at some of the pros and cons of a managed portfolio. A managed portfolio is when you a hire a financial advisor or fiduciary to manage your portfolio for you. This is an option for people who want to get started investing but do not have the time necessary to devote to managing their own portfolio.
A financial advisor is someone who you hire to manage your finances. Now, this may go beyond investing where the advisor could help you with goal planning, budgeting, insurance and tax savings.
Typically, the advisor will meet with you to understand your goals, and then create a plan that caters to these goals which would include the appropriate portfolio.
Now, if you do decide to go this route, we recommend that your financial advisor is a fiduciary.
A financial advisor and fiduciary are very similar in the services they provide but with some key differences.
Financial advisors who aren’t fiduciaries, receive commission on the investments they sell to their clients. This can cause a conflict of interest when creating a portfolio. They are not legally required to put their client’s interest first.
However a fiduciary is legally required to act with a higher standard of care. They are obligated to act completely objective, holding the clients interest first and they do not charge clients commissions.
Pros of a Financial Advisor:
Cons of hiring a financial Advisor
Now, a 3rd option that has come online in just the past 5-10 years or so is a Robo-Advisor.
Robo-Advisors are digital investing platforms that provide automated, hands-off investing services. They allow you to get started investing without the time needed to manage your own portfolio. Robo-Advisors are driven by algorithms that typically trade on ETF’s or Exchange Traded Funds and offer rebalancing services to ensure a user’s portfolio is properly weighted between asset class or security.
Robo-Advisors differ greatly from using a financial advisor. With a Robo-Advisor, you have the added benefit of leveraging index fund investing without the fees that a financial advisor would typically charge. Financial Advisor fees can add up quickly and are charged as a percentage of total portfolio, as well as commissions based on profits. Robo-Advisor fees typically charge an annual flat fee of up to .5% of the investor’s portfolio.
People who want to get started investing but simply do not have the time to manage their portfolio or want to pay someone high fees to do so would find Robo-Advising an attractive option.
Conversely, investors who use a Robo-Advisor are limited in their investing options. They can not choose individual stocks or even which index funds they want to invest in. Robo-Advisors are truly a hands-off investing strategy.
For the most part, Robo-Advisors have been a one-size-fits-all investing approach.
Those are primarily the three approaches when it comes to investing. Hopefully that gave you some insight and options to choose from.
After you have weighed your options of your investing approach (Self-Directed vs. Financial Advisor vs. Robo-Advisor), you must find a brokerage to use for your investments. A brokerage is an investment platform that allow you to create your portfolio. For a long time, Vanguard, Schwab, E-trade were leaders in this space, and still are good options. Only now, you have a tremendous amount of new options to choose from.
So, now we are going to review what you should be looking for in your features and we’ll also show you some of our favorite brokerages or investment apps out there.
There are many things to consider when choosing an investment app. But at Wealthplicity, we identified 5 key criteria that sets a brokerage or investment app apart from the others and they are:
I really like M1 Finance. Read our full M1 Finance Review here…
M1 Finance is an excellent investing platform that offers hands-on management as well as robo-advising capabilities. It is best suited for investors with a moderate level of experience due to its limited research functionality. It also offers high APY checking, low interest loans, and debit rewards as expanded features.
moderate investors, traders, robo-advisingGet M1 Finance Read Our Full Review Pros & Cons
M1 finance is a money management platform that automate the investing process. It is closing in on $4 billion in assets under management and has expanded its offerings from its investing platform to banking and loans (more on that below).
M1 Finance takes a unique approach to investing where the user creates what they call “Pies,” where the investor creates a portfolio out of a selection of stocks, bonds, or funds. They can also create Pies based on Expert Pies in a variety of categories, including, General Investing, Planning for Retirement, Hedge Fund Followers. They even have a Pie for those interested in creating an income investing strategy.
M1 Finance automates the construction and maintenance of your custom investment portfolio. After you create your Pie-based portfolio. M1 then automates the trading activity, allowing you to take a hands-off approach to investing. This feature is closely aligned to that of a robo-advisor, like Betterment or Wealthfront, but also allows you to override the automation, should you want to take a more active role in managing your portfolio.
I really like Acorns. Read our full Acorns Review here.
Acorns is an excellent investment app for beginning investors who want to participate in the stock market but are not ready for the hands-on management of a self-directed portfolio. They allow you to automatically invest “spare change” from your purchases, making recurring investments a breeze. Special Promotion: Sign up today and get $10
Beginning Investors, Robo-AdvisorGet Acorns Read Our Full Review Pros & Cons
Acorns is a robo-advisor app created and designed for new investors who want to participate in the market but aren’t ready for a hands-on experience. Over 9 million investors are using Acorns today.
Founded in 2012, Acorns provides a unique approach to investing, allowing new investors to automatically invest spare change from everyday purchases like gas and groceries. The spare change is then invested into a diversified ETF (Exchange Traded Fund) that is created based on your goals and experience. Acorns also provides automatic portfolio rebalancing so dividends are automatically rebalanced for you
Acorns investing opportunities are purposefully limited. You can’t select individual stocks, and there are no opportunities to trade options. It is a very straight-forward investment app for beginners, allowing them to realize the power of compounding interest and provides an excellent foray into the stock market.
As we mentioned, Acorns is best suited for new investors who want to get started investing but are not ready for a hands-on, self-directed portfolio.
Acorns makes investing and staying invested a very simple and straight-forward process. In fact, out of all of the investment apps we tested here at Weatlhplicity, Acorns set-up was the easiest to understand and get started.
The “Invest Your Spare Change” is a revolutionary idea, and while it seems that $.50 cents here and there isn’t a lot of money, you’ll be surprised how quickly it adds up.
Another excellent feature that makes Acorns a great investing app for beginners is their Investment Education Feature. Acorns partners with CNBC to provide a wide range of financial literacy content.
When it comes to choosing a Financial Advisor, you want to meet with someone face to face who lives in you area. You can always partner with the top firms but a great website that can match you with a financial advisor that corresponds with your goals and life style is Smart Asset. You can visit them and fill out a survey and they will match you with someone in your area.
If you haven’t yet invested but have been thinking about it, get started investing. Investing is the fastest way to create wealth that leads to financial independence. If managing your own portfolio seems overwhelming, you have options. There is no time like the present to get going.