Now before anybody starts throwing the internet version of rotten tomatoes at me, let me backtrack from that title a little. I like robo-advisors for small-time investors who are just starting out.

My mother is the perfect example. She barely has time to think after going to work and then cooking me three dinners. DAMMIT MOM THOSE FIRST TWO WEREN’T GOOD ENOUGH.

(tips over plates and then makes her clean up the mess)

(regrets nothing)

She has very little interest in money except spending it to go on vacation. And scratch tickets.

There’s no way she’s going to ever gain the knowledge to choose a basket of ETFs on her own. Traditionally, somebody like her would go down to the bank and an hour later emerge the owner of some overpriced mutual funds. If she uses a robo-advisor, she’s accomplishing the same thing while paying less in fees. It’s a decent deal.

But just because the fees are less doesn’t mean they won’t add up in the future.

The tale of two funds

Greg from Control Your Cash (RIP) used to call this the low-tar cigarette argument.

The average mutual fund in Canada has a management expense ratio (MER) of about 2%. Most of these funds are BAD NEWS, except there are a few that consistently outperform the market enough to justify their fees.

Then there are cheaper mutual funds. Tangerine has a total of five mutual funds that each charge 1.07% annually in management fees. This is a hell of a lot better than 2% or 2.5%. But it’s still damn expensive.

Say each of these Tangerine funds trail the market by 1% over the long-term. The market would make you 8% a year, while you’re taking home 7% a year with a Tangerine fund. It’s the same argument that’s been made in favor of index funds for years. The numbers are just smaller.

The sad part is I know personal finance bloggers who own Tangerine Funds. These people bill themselves as money experts, too.

Now let’s compare Tangerine funds to the average robo-advisor offering. If you’ve got $100,000 invested with Bank of Montreal’s robo-advisory service, you’re paying around 1% a year for fees. That drops to 0.9% with a quarter mil invested and 0.8% with a million bucks contributed.

Again, that’s a hell of a lot cheaper than a mutual fund. But it’s also way more expensive than just owning the damn index on your own.

The power of small numbers over time

Let’s crack out the ol’ compound interest machine and run a couple of scenarios.

The first investor uses a robo-advisor and pays, on average, 0.9% of their assets each year for the privilege of being able to phone somebody if they feel a little jittery. The market itself returns 8% a year, which means our investor makes 7.1% after fees but before taxes. He starts out with $10,000 (drug money, obvs) and adds another $10,000 each year from age 25 to 65.

Here’s how much money he ends up with.

robo scenario 1

Not bad, skippy. Not bad. Can I have a loan? I promise I won’t squander it on peanut butter cups.

Now let’s run the same scenario, but with an investor who finds the cheapest way to match the market. A portfolio filled with the cheapest Vanguard ETFs would average about 0.1% per year in fees. So we’ll assume our imaginary investor gets a 7.9% return.

The difference is staggering.

robo scenario 2

That “small” fee the average robo-advisor takes? It can add up to $600,000 over a lifetime. Or to put it another way, the person who minimized fees ended up with 25%(!!!!!) more money than the person who chose the so-called low-cost option.

Fees matter. Even small fees.

The crux of the argument is pretty simple. Switching from expensive mutual funds to cheaper alternatives is like cutting your three slurpees per day habit down to two. Sure, it helps, but it’s not the best solution.

Look. You read Financial Uproar. You’re smart enough to start investing on your own. There’s no reason for you to keep using a robo-advisor. I’m convinced that damn near anybody can figure this stuff out and then only consulting a professional when absolutely needed. All it takes is a little patience and reading a few books.

You owe it to yourself. Even if you’re not saving $10k a year, fees can still add up to a lot over time. Avoid them with extreme prejudice.

Tell everyone, yo!