Get Started Investing: Self-Directed vs. Financial Advisor vs. Robo-Advisor

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.

Get Started Investing with The Self-Directed Portfolio (DIY Option)

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:

Pros:

Become financially literate through investing: Obviously a big one. When it comes to investment education, knowledge truly is power. And becoming financially literate in investing is more than just making money. That’s the biggest but you’ll find it opens up so many doors to you in other aspects of your life. You can maintain a tighter budget, your taxes make more sense, performing a cost benefit analysis of a new purchase becomes almost immediate.

No More Minimum investment accounts – A huge benefit of managing your own portfolio is that so many new brokerages now offer no account minimum, which means that you are not required to deposit a certain amount into your investment account. In fact, about 1/3 of all investors who opened an account last year did so with less than $500. This is such a great feature, so you don’t feel obligated or overwhelmed when you first start out.

Access to Zero-commission investing and trading – It used to be if you wanted to sell a stock under a certain amount of time or place an options trade, you would be required to pay a fee. It doesn’t make sense that you were to be charged to make changes to your own portfolio, but that’s how a lot of these brokerages did for a long time.

Access to Fractional Shares Investing – Want to invest in Amazon but don’t want to spend $3500 on one share. Fractional shares investing now lets you buy just fractions of a single stock. So instead of spending $3500 on one share of Amazon, you can buy 1/3 of a share for $1,050. It lets you participate in great, mega-cap stocks that may be too expensive for a full investment

Cons:

Steep learning curve – Taking the time to learn how to invest as you are now, is a great first step. But there is nothing like experience. And you’ll quickly find that investing is a wide open world

Time and effort – As I mentioned earlier in this lesson, time can be a huge constraint. We all have lives and priorities so finding time to manage your portfolio can become a burden if you don’t allocate the right amount of time.

Start Investing with a Financial Advisor

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:

Frees up Your Time while you still get started investing: There are talented money managers out there that would allow you to still participate in investing if you concluded that you did not have the time to manage a portfolio yourself.

Still more lucrative than a savings account: Still good to have cash as part of your portfolio but even then there are low risk, low yield funds or bonds to invest in that would provide more return than a standard savings account.

Cons of hiring a financial Advisor

Loss of financial independence: This is a big one to me. While you may be able to gain financial traction and earn capital toward your goals, you are not truly independent because you are still dependent on someone to manage your money for you. Likely, you will be grouped in with others who fit your profile into the same portfolio and

Costly Fees: This is another big drawback. Money managers and financial advisors typically charge a management fee of 2% of your total portfolio size and then also take a percentage of any profits. This varies by manager but these fees can seriously add up and eat into your well earned capital.

Now, a 3^rd option that has come online in just the past 5-10 years or so is a Robo-Advisor.

Get Started Investing with 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.

Get Started Investing by Finding the Right Brokerage

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:

Investor Fees – How much does it cost to use the platform? Are there commission fees or fees on trades? How complicated is the fee structure? Make sure you read the fine print. Fees are pretty low these days but they can get you based on the size of your portfolio or total usage. Make sure you feel comfortable and not-at-all confused of the apps fee structure.
Flexibility of Offerings and Features – Does the platform offer a wide variety of securities or deals to invest in? What other features does the platform offer beyond investing? Some apps lack specific features which can be frustrating as you become a more experienced investor. Features like options or access to ETF’s can be missing. So, you want to make sure that you have a wide variety of features and offerings even if you don’t use them all right away.
Investor Requirements – Does the investor need to be accredited? How experienced does the investor need to be? What is the minimum investment required? Some apps require you to be an accredited investor. This means that you must have an annual income exceeding $200k or have a million in net worth. Most of the apps that require that are specialty apps like high-cost real estate.
Usability – How user friendly is the platform? How is the Customer Service? Most investment platforms are run on apps nowadays, as they should be. Many of them are professionally done and easy to navigate but you sometimes run into load issues or confusing site organization,, You want to make sure the app you choose allows you to seamlessly navigate the information you are looking for,
Transparency – How hard is to find critical information such as risk and the annual rate of return if relevant? This used to be “How much money can you make using this” and you can get those returns on the robo-advisor apps but obviously self-directed portfolios depend on the user. It is important that the app or brokerage is transparent with their information, rather than only have marketing language on their website.

Top Investment App for the Self-Directed Portfolio:

I really like M1 Finance. Read our full M1 Finance Review here…

Our Rating:

4.5/5

M1 Finance

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.

best for:

moderate investors, traders, robo-advising

Get M1 Finance Read Our Full Review Pros & Cons

Pros:

Very low fees and straightforward fee structure
Evolving features such as lending and high APY checking
Broad access to stocks and funds
Robo-advising features
Great usability on desktop and mobile
Easy transparency around rate of return and results

Cons:

Limited research and education
No access to financial advising

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.

The Best Robo-Advisor on the Market

I really like Acorns. Read our full Acorns Review here.

Our Rating:

5/5

Acorns

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

best for:

Beginning Investors, Robo-Advisor

Get Acorns Read Our Full Review Pros & Cons

Pros:

Simple User Experience
Easy and affordable fees
Great platform allows you to “invest spare change”
Educational Assets

Cons:

ETF performance info hard to find
Limited hands-on activity (though this is intentional)

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.

Finding a Financial Advisor

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.

Summary for Self-Directed vs. Financial Advisor vs. Robo-Advisor:

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.