Why you should love robo-advisers

Robo-advisers have been around long enough that the question is no longer whether you should turn your investment decisions over to a computer.

Now the question is: Why wouldn't you?

The success of Wealthfront and Betterment, two startups that helped launch the trend, led mainstream investment companies including Vanguard, Schwab and Fidelity to add robo-advice services in recent years.

Depending on the robo-adviser, you may also have access to human financial advisers, socially responsible investments and tax-loss harvesting to help reduce tax bills.

This is not, and never really was, a niche product only for tech-oriented millennials. From the beginning, investors of all ages spotted the significant advantages of letting computers run their portfolios.

Among them:

Robo-advisers — also known as automated financial advisers — use computer algorithms to invest your money and rebalance the portfolios as needed to meet your goals. Robos typically use ultralow-cost exchange-traded funds and charge annual management fees of about 0.25 percent, for an all-in cost that can land under 0.5 percent.

This is a huge deal, since costs have an enormous impact on your ultimate returns and are among the few factors you can actually control.

Let's say you invest $10,000 and market returns average 7 percent over the next 30 years. If you lose 2 percent to fees, your investment would grow to about $45,000. But if your fees are just 0.5 percent, your investment could reach $70,000.

Robo-advisers won't put you in an investment that costs more or performs worse than available alternatives because they'll earn a higher commission or a free trip to Aruba.

That still happens all too often with human advisers. U.S. regulators have so far resisted calls to impose a universal fiduciary standard, which would require financial advisers to put their clients' interests ahead of their own.

Robo-adviser services aren't perfect. The SEC in December 2018 announced a settlement with Wealthfront for making false statements about its tax-loss harvesting service. Tax-loss harvesting allows people to defer tax bills by selling a losing investment to offset the profit from a winning one.

Wealthfront failed to properly monitor accounts against such "wash sales," which occurred in 31 percent of the accounts with tax-loss harvesting over a three-year period, the SEC says.

But a quick scroll through the SEC's other enforcement actions last year show that this is far from the worst thing that can happen to an investor. From billion-dollar Ponzi schemes to stockbrokers getting paid to steer people to high-cost funds, humans pose a much bigger danger to investors.

Robo-advisers may not be the best option for people who may panic and sell in a downturn. Those folks may need human financial advisers to hold their hands and talk them out of a bad decision.

Also, you probably don't have access to a robo option within your 401(k) — at least not yet. (Your next best option may be a target-date mutual fund, which, like a robo, does the investment allocation and rebalancing for you.)

Otherwise, most people should at least consider a robo-adviser, and that's true even if they also need financial planning advice.

But most investment management is a commodity, while good, individualized, comprehensive financial planning advice can be priceless — and can't be replicated by a computer.

It can make sense, in other words, to pay a premium for quality financial advice that a robot can't offer. It doesn't make sense to pay a premium for a service that a robot could do better.