Does Your Financial Plan Need a Cart or a Caddie?

Planning for your future is no short game. In order to plan properly there are many important factors to consider when choosing between a robo- or human-advisor.

Focusing on your drive 

How does your golf game relate to your financial plan? Although your retirement assets will never need to reach for the putter, they do benefit from the same direction, guidance, and strategy you would strive for in your golf game.

How do you reach the pin on the 18th hole of your own personal retirement?  Do you use a golf cart to zip around at minimum expense, relying on the yardage and the green book to give standard details and suggested plays for each hole? Or do you instead prefer to stroll with a caddie, a professional who knows the course and whose goal is to assist you in analyzing your risk factors and providing you with much-needed personal insight to avoid sand traps and water hazards?

The answer to which of these methods works best depends on a number of factors that differ for every player stepping onto the course.  Below are some important considerations that can help you make the most informed decision for your long-term financial well-being.

Investing is a lifelong strategy intended to build a nest egg for you to live on upon retirement and to pass on to future generations.

When you are new to golf the most important thing you can do is focus on your swing.  The swing is the first step on the journey of getting to the green and mastering this important skill takes practice, practice, practice.  Likewise, when you are beginning to invest, the most important goal is to minimize your expenses and to save as much as possible so as to drive the investment “ball” as far as you can.  Getting into the habit of “practicing” saving will benefit you greatly over the long haul.

Making your own way

When simple exposure to the market is your primary goal, the use of a robo-advisor is perfectly a fine option. 

Once your savings begin to accumulate, the next important step is getting your assets invested.  In golf, the main benefit of a cart is that it comes in handy when your primary need is to move from point A to point B as quickly as possible.  When it comes to your investments, a robo-advisor can serve as a type of cart, allowing you to quickly get your money to work.

With so many stocks, bonds, mutual funds, and exchange traded funds (ETFs) to choose from, sometimes the biggest challenge is picking your investments.  No one wants to start his or her portfolio journey with a losing investment so the pressure to choose your first “winner” can be paralyzing. A robo-advisor can help eliminate the need for you to make these choices by automatically investing your savings into a diversified portfolio of investments for overall market exposure.

For most players, the primary benefit of using a robo-advisor is the same as choosing a cart over a caddie: lower cost to play. Robo-advisor fees typically range from 0% of total portfolio assets (SoFi Automated Invest) to around 0.35% of portfolio assets (Marcus by Goldman Sachs) as opposed to tiered structures of between 0.55% and 1.0% for fiduciary, fee-only registered investment advisors (stepping down for more assets under management.)

The use of a robo-advisor makes good sense for many investors.  For those at the beginning of their investment journey who are in the accumulation stage of building personal wealth, or for those with a strong tolerance for risk, or simple tax situation, the savings benefit of a robo-advisor may well outweigh the cost of not having a professional in your corner.

When To Bring the Pros Into Play

“I never had any thought the whole week. I figured my caddie [Jerry Beard] knew the course a lot better than me, so I put out my hand and played whatever club he put in it. I’d say, “How hard do I hit it?” He’d tell me and I’d swing. The guys who come down here once a year and try to get smart with Mr. Jones’ course are the dumb ones.”

– Fuzzy Zoeller (on winning the 1979 Masters as a rookie) 

When liquidity needs, tax planning, and the need for advanced investment strategies begin adding strokes to your score, a caddie can help to markedly improve your game. 

So when does it make sense to move your assets from the cart to a caddie?  When should you transition from simply practicing your swing to minimizing your strokes on the course?  When does it become more beneficial to have someone guide you through the complexities and unique challenges of each course?

Think of the course as your investment horizon and the way you play as a representation of the different cycles of your life. There comes a point where it is less important to grip it and rip it and it becomes much more important to focus on accuracy and placement. Once your net worth has reached a meaningful level, most players prefer to lay up and preserve their hard-earned capital rather than focus on hitting the longest drive.

Sometimes the current ease of the course can lull players into a false sense of security. 

Just as most players can shoot incredibly low numbers on par-3 courses, just about anyone can generate positive returns in market environments like those we’ve seen over the past several years.  However, when a par 5 is encountered, not having a steady hand to guide you through the downturn can quickly diminish your returns.

Another good indicator that it might be time to hire a dedicated investment advisor is when you start to get within range of retirement.  At that point, tax issues start to play an important role necessitating more advice than just which funds to invest in.  If a comprehensive withdrawal strategy has not been formulated ahead of time you may end up paying a large portion of any fees you may have saved by using the lower-cost robo-advisor back to Uncle Sam.

Although the cost of professional guidance may be a bit higher, the value-add an advisor can offer will often save you time, stress, and money over the course of the loop.  Employing a professional ensures that you will play with the most knowledge and strategy possible for the entirety of the course.

Quantifying the Value of Personal Attention

In both golf and investing, having a professional to help you along the way can be well worth the additional expense.  Many of the benefits of using a golf professional directly correlate to benefits of using an investment professional:

Caddie

  • Maintain clean golf clubs
  • Share course strategies
  • Club selection 
  • Reading greens
  • Yardage guidance
  • Carry your clubs through the course
  • Keep clubs neat and clean
  • Keeping you calm and focused

Financial Advisor

  • Maintain appropriate strategic asset allocation
  • Share financial competence strategies
  • Select appropriate mutual funds and ETFs
  • Tactical asset allocation (risk management)
  • Spending strategy (withdrawal order)
  • Focus on your long-term your goals
  • Provide advice on all financial decisions
  • Behavioral coaching

While a robo-advisor can be a useful low cost tool for investment beginners, when taxes, risk of investment loss, and concern for your financial future become a greater priority than merely exposure to the market, it may be time to consider employing a personal advocate for your long-term financial future.

When simple practice is no longer adding value to your game, specific instruction from a knowledgeable source may prove invaluable.  Just as a caddie manages your golf game, a financial advisor is responsible for managing all facets of your financial future. Developing a sound withdrawal strategy, comprehensive tax planning, and an investment allocation that is more diversified and tailored to your unique goals will help to ensure the retirement you have envisioned.

If you are feeling like your personal situation calls for an evolution from just simply investing in the market to needing more hands-on guidance on how to plan for your retirement, it is probably time to add  an expert to your team. We at Causey would be happy to discuss the ways we can help you along the way.