I love robo-advisors.
What is a robo-advisor?
I’ve been surprised how often I get this question from friends (although I shouldn’t be surprised with how much time I spend on my finances). There is a lot of coverage on the rise of robo-advisors and their impact on the financial services industry. More importantly, the big brokerages, Schwab, TD Ameritrade, Vanguard, etc. have started their own.
Simple Definition: Algorithms and software manage your money for you instead of a human
Get it? Robots & Advising.
There is a lot of research showing a well-diversified portfolio meets the need of 99% of people. Warren Buffet has famously said a standard market index ETF (a fund you can buy like a stock that holds thousands of stocks, like VTI) is his recommendation for investors. Robo-advisors give you a well-diversified portfolio, catered to your risk tolerance, and add in benefits like free trades, rebalancing, and tax loss harvesting. Traditionally, this type of wealth management is reserved for only the wealthiest of individuals.
Why I like robo-advisors?
Good returns, low risk, reasonable fees. What’s there not to like? (several things actually, which I’ll cover later).
A manager (think of Wells Fargo, Goldman Sachs, Bank of America) charges between 1% to 2% to manage your money. Also, if you have less than $100,000 under management … you are a 2nd tier client. $20,000 might be a lot to you, but not compared to your manager’s $1,000,000 customers. Robo-advisors give everyone these benefits.
In comparison, robo-advisors range from 0% to 0.8% for the management fee. Also, the amount to start can be as small as $500 ($1 in some cases). This fact makes robo-advisors up to four times cheaper than a human manager.
It’s easier to take money out if you need it. You should not steal from your investments, but when you get a surprise tax bill, they will sell shares and get you cash in the most tax efficient way without the lecture.
Don’t forget all the cool features.
Tax Loss Harvesting (creating an artificial loss on the books for tax purposes by selling and rebuying), regular rebalancing (ensuring you’re well-diversified as your stocks values change), and free trades (trades that are free … if that wasn’t clear) are included with most services.
“Wow, Damien! This is amazing. What’s there not to like!?!?”
What I don’t like about robo-advisors?
The single biggest complaint about robo-advisors:
“I can do it all myself and save the money.”
What they are doing isn’t that hard if you learn it. You could even put $1,000 in an account, look at what they do, and reproduce it on your own for 0% management fee. Saving a couple of percentage points can add up over the years.
Also, you don’t have someone to talk to when stuff gets weird (this is changing as some companies offer both a robot and a person). While it’s not his fault, it can be refreshing to yell at your manager when the market drops.
Lastly, they are still new. There is a lot of research and math behind these models, along with extensive backtesting, but they are still relatively new.
Which robo-advisor do I use?
My advisor of choice is Wealthfront.
Everyone is different, but here are the reasons I choose Wealthfront
- The first $15k is managed for free, forever
- One of the first and not a bank (I don’t like banks)
- Direct Indexing, where they will buy stocks instead of ETFs for more tax loss harvesting and fewer ETF management fees
- Competitive 0.25% management fee
I used to be a hardcore Betterment supporter, but then they raised fees for accounts above $100K. Betterment went from 0.15% to 0.25%, and I’m not the only one upset. Since Betterment doesn’t offer any money managed for free, Wealthfront became much more attractive. But, they do offer a human (at an increased 0.40% rate) for accounts above $100k now and have no account minimums.
Charles Schwab’s Intelligent Portfolio is a free option from one of the majors. They offer tax loss harvesting, but many complain about how much cash they keep in your portfolio (up to 30%) and their $5,000 account minimum.
Vanguard, a powerhouse in the cheap ETF space, launched Vanguard Personal Advisor Services. At 0.3% you get access to an advisor who will look consider accounts outside of Vanguard, but needs a $50,000 account minimum and Tax Loss Harvesting is on a client by client basis. They have managed to become the biggest in term of dollars managed and was high on my list of consideration. The lack of Tax Loss Harvesting killed it for me.
There are a lot more with various costs and features. Check out NerdWallet’s Best Robo-Advisors for 2017 for more.
Personally, I signed up for both Betterment and Wealthfront in 2014 (they were the only two big ones then) and made my decision after watching them for a year. I think Betterment is easier to use, with a better user experience, but Wealthfront seems to focus more on hardcore financial innovation. Now, I never actually log into the account, and the fee change made me move from Betterment to Wealthfront.
Are they right for you?
If your money is just in a savings account, 100% yes. They are the simplest and easiest ways to start investing and earning a real return.
If you are a seasoned investor, then you can figure out if it makes sense for you. Personally, I love the convienience and tax loss harvesting. I don’t keep all my assets in one, but I do view it as a solid well-diversified base that holds most of my assets outside of real estate.
Leave a comment on your thoughts or experiences with them or questions about how they have worked for me.