Robo-Advisers popular, but are they right for you?
Low fees have them walking away with a lot of business these days, but is one right for you?
There’s a lot of buzz on Wall Street these days about investing technology and “robo-advisers” — automated investment services that use algorithms and Internet tools to manage your portfolio.
With good reason. Countless studies have shown that active portfolio management, with humans trying to pick the best stocks, consistently underperforms the market in general.
S&P Dow Jones Indices data through 2014 show almost 89% of actively managed funds posted worse five-year returns than a vanilla index such as the S&P 500, and about 82% posted worse returns across the prior 10 years.
In addition to better returns, passively “indexing ” your portfolio also can save you a bundle on management fees.
It’s this focus on low-fee, passive investing that has given rise to a host of new products in recent years, including robo-advisers. Roughly 30% of investors with more than $100,000 in assets are already using some form of robo-adviser, according to an analysis by Market Strategies International.
Of course, that means a scramble among new providers to enter this marketplace, leaving consumers unsure which product — if any — is best for them.
So here’s a look at a few different forms of robo-advisers and what they can offer investors. AUTOMATED ROBO-ADVISERS The most obvious benefit of a digital investment adviser is the reduced cost. Take leading roboadviser firm Betterment, which boasts $2.8 billion in assets under management and roughly 115,000 customers. Betterment charges 0.35% for accounts under $10,000 in assets, 0.25% for accounts between $10,000 and $100,000 and just 0.15% annually for accounts above $100,000. That’s significantly cheaper than the 0.64% charged by the typical mutual fund or ETF, according to Morningstar.
But Jon Stein, founder & CEO of Betterment, is quick to point out the savings come from bestin-class technology, not overly simplistic financial advice.
“I would strongly reject the idea that there’s a correlation between personalization and human involvement,” Stein said. “Our portfolios are probably more personalized than what you would get from most live advisers because we ask you about your goals.”
These include how much you plan to spend in retirement, as well as sophisticated strategies, like when to sell certain investments for maximum tax efficiency.
Betterment isn’t alone in seeing the power of robo-advisers. Rival Wealthfront is also growing fast, with $2.6 billion in assets, and waives advisory fees to any account holding $10,000 or less. Even legacy financial firms offer automated advisory services, including Charles Schwab with its Intelligent Portfolios service.
The services differ, but one thing they all share is a reliance on technology and a commitment to significantly lower fees as a result of fewer human advisers demanding a cut.
TECH WITH A HUMAN TOUCH
Personal Capital is one example of a service like this. It offers a free app available for iPhone, iPad and Android that links your financial accounts and provides lots of data and a bit of automated advice. The tools will not just tally up your wealth but also analyze the fees you’re paying.
If you find you’re ready to take serious action or that you need help just making sense of things, Personal Capital will connect you with a human adviser for a 1% fee, getting you beyond the app to act on your financial goals. “While low fees are absolutely important, we believe that the human element is still necessary,” said Bill Harris, CEO of Personal Capital.
One of the biggest names in retirement planning, The Vanguard Group, sees tremendous opportunity in marrying digital products with human advisers.
Vanguard has around $3 trillion in assets under management, and roughly $25 billion of that cash is in its Personal Advisor Services segment. It’s like Personal Capital only in reverse, enlisting a human financial adviser at the beginning to set your personal goals, then using sophisticated digital services to keep you in the know as you save.
“Technology really became the enabler to allow us to scale the program at an attractive price point,” said Frank Kolimago, principal at Vanguard Personal Advisor Services.
That price point is 0.3% of assets annually, or $300 each year on a $100,000 portfolio. The downside to some smaller investors, however, is that Vanguard requires a minimum of $50,000 to join the program.
“Whether you’re getting Vanguard funds directly through us or getting us through the robo side of the business or the fullservice side, low-fee and well-designed and well-diversified funds are ultimately great for investors regardless,” Kolimago said.
No matter your platform, the benefit of keeping costs low for individual investors with hightech tools is one thing that all these firms can get behind.
“This is an exciting time for all investors because it’s one of those rare times when investing is really changing for the better,” said Jon Stein of Betterment. “This time, instead of being driven primarily by regulation, it’s being driven by technology.”