Interest in online investment brokers is rising. In 2020, more than 10 million accounts were created with brokerages like Robinhood, Fidelity Investments, and E-trade, according to an estimate from JMP Securities, an investment bank. Robinhood reached an estimated 500,000 downloads in December alone.
People who use investment apps are less likely to seek advice from a professional financial planner. In 2021, meetings with financial advisors dropped 11% for people who use investing apps, according to Parameter Insights.
There are a few reasons why people choose to invest with an app instead of an advisor. Some people don’t have a lot of money to hire an advisor. Or they’re attracted to the idea of a “free” trading app, says Brian Fry, certified financial planner and founder of Safe Landing Financial.
While apps may cost less than a professional advisor, they're not 100% free. Apps also won’t suggest the best investments for you or walk you through the tax implications.
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How to DIY your investments
There are a few ways to invest your money online without a financial advisor.
Investing apps like Robinhood, Acorns, Betterment, or Stash live on your phone and connect to your bank accounts. These apps can make it easy for you to make frequent trades, which may require some time and research on your end, says Fry. For example, Acorns rounds up your purchases and funnels your spare change into an investment account, but you still have to tell the app what to invest in.
If you want to be a successful active DIY trader, you’ll have to be a newshound and dedicate most of your day towards trading, says Fry.
“If you don't have that time and you're not interested at all in following the markets or the news, you're probably not in the right place,” Fry says.
If you don’t have the time to dedicate to trade on a regular basis, you can find more passive investments like an index fund or target date fund. These funds can be purchased on investment apps or sites like Vanguard or Schwab, who will tell you the funds details and its performance history.
Some e-trading sites offer a robo-advisor that can offer more guidance on your investments. Most robo-investing platforms rely on algorithms that balance risk tolerance and expected returns. Using software to invest can be less expensive than consulting a financial planner, but the advice may not be as tailored to you specifically.
What are the risks of DIY investing?
Investing apps can make it easier to trade on a daily basis, but it’s important to know when you can and cannot sell a stock and how it’s taxed.
When you make money from an investment, you’ll have to pay capital gains tax. There are two types of capital gains taxes: short-term and long-term.
Short-term capital gain taxes apply to investments that you’ve held for less than a year. Your profits will be taxed at your standard income tax rate.
Long-term capital gain taxes are for investments you’ve held for longer than one year before selling. Rates range from 0% to 20% depending on your taxable income, but most people don’t pay more than 15%.
You will have to file taxes on your investments whether you made a profit or suffered a loss, says Derek Silva, personal finance expert at Policygenius. When you lose money on an investment, you can claim up to $3,000 of capital gains losses as an individual on your tax return, Silva says.
You can expect your investing platform, app or otherwise, to send you a 1099-B tax form or 1099-DIV form, depending on the type of investment. They may also send Form 8949, a detailed list of every trade you made on the app.
The biggest rule DIY investors need to be aware of is the wash-sale rule, Silva says. The rule says an investment cannot be sold at a loss, then bought back within 30 days. If you do that, your initial loss can’t be claimed on your taxes.
Without Form 8949, it may be hard for you to keep track of every transaction you made on an investing app, Silva says. This is something a financial advisor can do for you.
“If you're a very active trader, it's easy to lose track of how much income you have and how much tax you should be paying,” Silva says. “The result is probably a tax bill and that's not a good surprise at the end of the year.”
There are a few reasons you may not receive a 1099 form from an app. You won’t get a 1099 form if you only made small profits on your investments, Silva says. But you should still report any profits on your tax return. If you’re expecting a form and don’t receive one, Silva says to contact the app directly.
Do you still need a financial advisor?
It’s important to have some idea of why you’re investing and how you want your money to grow.
Managing your investments independently can be less expensive, whether you consult a robo-advisor or go it alone. On average, it costs $2,400 to get a comprehensive plan from a financial advisor.
That fee can also include professionally handling your investments and making adjustments as needed according to your financial situation. Research conducted by Dalbar, a financial services market research firm, shows investments handled by professional advisors can outperform DIY investments.
To test investment performances between a robo-advisor and human advisor, Hanna Horvath, certified financial planner and managing editor at Policygenius gave a robo-advisor and human advisor $5,000 to see what each would invest the money. Each advised her how to diversify her investments, but the financial advisor projected higher returns than the robo-advisor did. Most advisors assume the market will increase over time at a rate of 8% to 10%
The best move for you will depend on what you want from your investments and how you plan to use that money. Having a financial advisor can help you diversify your portfolio and map out your financial goals based on your needs.
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