Robo advising is the hot topic, and all of the emphasis seems to be on how easy it is to do and how much lower the costs are than other ways of investing.
But you still need to make sure you’re doing the right thing, since there’s far more to investing than just the fees you pay.
There’s no question that fees can reduce your returns. But not paying fess could also have a negative effect on your returns, if it means you’re not getting sound advice.
Robo advisers have no emotion or decision-making abilities other than to do what you tell them to do. So if you decide you want to cash out your registered retirement savings plan (RRSP) and pay off your holiday-season credit card bill, they won’t stop or advise you.
But if you’re dealing with a human adviser or financial planner, they’ll show you how much tax you will pay if you take money out of your RRSP. They’ll show you the lost growth inside your RRSP and what that means to your retirement income. They’ll show you that there might be other cheaper and better ways to reduce the debt.
Maybe you could just pay that debt off out of cash flow over the next year. The interest you pay doing this is likely far less than the tax you would pay by taking money out of your RRSP. If cash flow is tight, maybe you could stop your monthly RRSP contributions and use that money until you pay off the debt. A human adviser will show you the best way to manage your financial affairs, not just your investment portfolio.
Once you take money out of an RRSP, that money can’t go back in; you’ve lost the contortion room, unlike with a tax-free savings account (TFSA), where money taken out can be replaced the following tax year.
There’s a big difference between an investment plan and a financial plan. An investment plan is just one small part of a total financial plan; a true financial plan will address all financial aspects of your life, including retirement, taxes, education, insurance, debt reduction, savings and travel. A financial plan blends all of these items into one comprehensive package.
Think of a financial plan like a road map. You explain to your planner where you are and where you want to be, and what you want to see along the way. A planner works with you and guides you. If you get off course, they provide you with advice on how to get back on track. They can show you what adjustments to make to ensure you’re headed in the right direction.
If all you’re looking for is investment advice at a reduced cost, then a robo might be the best option. However, if you’re looking for a real financial plan, it’s unlikely that a robo can replace human emotions and advice any time soon.
Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle. Bill has more than 26 years of experience in the financial services industry.
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