Warren Buffett's advice for ordinary investors is simple: Invest your retirement portfolio in an S&P 500 index fund.



However, at least one financial advisor thinks the Oracle of Omaha is off base.

That strategy "doesn't work anymore. It's not actually making the most of your money. You can do a lot better than that," Jon Stein, CEO and founder of Betterment, a robo-advisor with more than $8 billion of assets under management, said in a recent CNBC "On The Money" interview.

Stein said that portfolios built by Betterment can beat an S&P 500 Index fund over time because Betterment optimizes taxes to enhance performance.

Betterment estimated its tax-loss harvesting service can add 0.77 percent to an average customer's after-tax returns annually. Also, by automatically coordinating where assets are located among taxable and tax-deferred accounts, the firm said it can produce another 0.10 percent to 0.82 percent each year.



Many robo-advisors, including Betterment, Charles Schwab and Wealthfront, offer automatic tax-loss harvesting, which means they sell an investment to generate a loss to offset capital gains.

"Tax-loss harvesting does nothing for you if your assets are in an IRA," said Scott Smith, a director at financial service research firm Cerulli Associates.

That is because IRAs and workplace retirement plans, like 401(k) plans, are tax-deferred, meaning investments grow tax-free until they are withdrawn from the account. For Roth IRAs and 401(k) plans, contributions are taxed so the withdrawals are tax-free.

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Robo-advisors can create portfolios that are more diversified than an S&P 500 fund. Most of the automated services build their portfolios with low-cost index funds that invest in U.S. and international stocks and bonds as well as real estate and commodities.

When customers sign up with a robo-advisor, they are usually asked a series of questions to determine their risk tolerance. Based on how people answer those questions, a portfolio of funds is constructed. Returns for those portfolios can vary widely, depending on the robo-advisor's investment strategy and the funds they use.

These services have low investment minimums. For example, Betterment has no account minimum while you will need at least $3,000 to invest directly in an S&P 500 index fund at Vanguard.

Robo-advisors generally charge an annual fee between 0.25 percent and 0.50 percent of assets on top of the expenses of the underlying investments.

While those fees are lower than the 1 percent annual fee most financial advisors traditionally charge, you will be probably paying less if you simply invested in an S&P 500 index fund. For example, iShares Core S&P 500 ETF charges just 0.04 percent annually.