Robo-advisors are one of the hottest stories in the financial media. And they should be, as assets invested with these firms continue to increase.
The advent of online financial advisors has accelerated changes in the way more traditional financial advisors and advisory firms operate which is very positive. Just like traditional financial advisors, not all robo-advisors are the same. Moreover, the scope and services of robo-advisors continue to evolve, and in some cases they are becoming integrated with more traditional advisors. Let’s look at some of the robo-advisors and the differences in the services offered.
Geared Toward Beginners
Learnvest focuses on budgeting and basic financial planning and seems geared towards younger investors. Learnvest is a good example of a service that integrates technology with the human touch, as each client works with a financial planner via phone.
There is an initial fee of $299 and then a monthly fee of $19. Note: while Learnvest provides detailed portfolio analysis and investment recommendations they do not actually invest money for their clients. This is up to the client at whatever custodian they choose. (For more, see: Robo-Advisors and a Human Touch: Better Together?)
Betterment focuses on investing and implements their automated services via the use of index exchange-traded funds (ETFs). Their fees are based on a percentage of assets and range from 0.15% to 0.35% based on the size of your account. Your money is allocated based on the results of their goal-setting tool based upon one of their model portfolios. For investors with assets in excess of $500,000 customized portfolios are available. (For more, see: What's the Best Robo-Advisor?)
Betterment also offers a tax-loss harvesting service for those with taxable accounts. Also of note, they recently forged a relationship with Fidelity, more on that later in this article.
Further Along the Curve
Wealthfront is another service that utilizes ETFs in its automated asset allocation models. They are in many ways similar to Betterment. Their fees start at 0.25% of assets with a minimum investment of $5,000.
Wealthfront offers a different approach to tax-loss harvesting compared to Betterment’s; for investors with $500,000 or more they will purchase up to 1,000 individual stocks plus an ETF for smaller companies in a move they say allows more targeted tax-loss harvesting opportunities. (For related reading, see: How Financial Advisors Can Adjust to Robo-Advisors.)
Sigfig offers three levels of service and aggregates your accounts at outside custodians. They offer a free portfolio tracking service, a service that helps you maximize the income from income producing investments like CDs and money market accounts as well as an asset management service that allocates your portfolio and helps you rebalance and track performance.
Motif Investing touts “Commission-Free, Professionally Built Asset Allocation Models” as a headline on their site’s homepage. Motiff offers pre-designed asset allocation portfolios of 30 holdings (ETFs or individual stocks) that investors can buy for $9.95 per transaction. This includes the ability to customize each portfolio to fit your needs and preferences. (For more, see: A Guide to Choosing the Best Robo-Advisor.)
Personal Capital was founded by the former CEO of PayPal and they have assembled a management team of executives with extensive technology and financial services experience. Personal Capital offers a free dashboard that allows users to take a consolidated view of all their accounts in one place.
Beyond that, Personal Capital offers full wealth management services and targets investors with over $100,000 in assets who have the need for such advice but who may be too small to be on the radar screen of many traditional financial advisors. (For related reading, see: Is an Online Financial Advisor Right for You?)
Wise Banyan offers investment advice for free and hopes to make money via value-added services like tax-loss harvesting.
Sister services Market Riders and Rebalance IRA both cater primarily to investors focusing on retirement.
This is only a partial list of the robo-advisors out there and certainly new entrants will crop up as this service model gains in popularity. (For a list of robo-advisors, click here.)
Varied Fees for Varied Services
Fees vary by robo-advisor based on services. Most robo-advisors offering investment advice will charge a fee based upon a percentage of the amount on which they are rendering advice. These fees vary from free for Wise Banyan to approaching 1% for others. Most seem to range from 0.15% to 0.50%. (For related reading, see: How Financial Advisors Can Adjust to Robo-Advisors.)
A few charge a flat ongoing fee; several will charge a one-time set-up fee as well.
Several firms have minimum levels of invest; Personal Capital’s is $100,000. Others have tiered fee levels based on the amount invested.
Big Financial Services Firms
The success of robo-advisors certainly has not been lost on financial services giants like Vanguard Group, Fidelity Investments and Charles Schwab Corp. (SCHW).
Vanguard’s Personal Advisor Services has already more than doubled the assets managed by Wealthfront, one of the most successful robo-advisors. Vanguard’s fee is a competitive 0.30% of assets and has an account minimum of $50,000 (down from $100,000 during its beta test). (For more, see: Who Wins With Robo-Advisors? Everyone?)
For this fee clients receive a financial plan, ongoing portfolio monitoring and rebalancing, as well performance forecasting. Combine this with the fact that Vanguard has hired a number of financial advisors to staff this program and this seems like a robust offering for the price. Vanguard freely admits that the service typically recommends Vanguard’s own mutual funds and ETFs to clients.
Fidelity Investments has teamed with Betterment and is encouraging financial advisors who custody assets to use this service with appropriate clients. Additionally Fidelity has invested in robo-advisor Future Advisor, who is a competitor of Betterment’s.
Schwab Intelligent Portfolios allocates as much as 48% of an investor’s portfolio five Schwab ETFs based on the fundamental indexing approach of advisor Rob Arnott. The service will utilize model portfolios for investors based upon their goals and risk tolerance. The portfolios will make extensive use of this “smart beta” approach. (For more, see: Schwab's New Robo-Advisor Service Explained.)
Additionally each of the portfolios has a significant allocation to cash via Schwab’s affiliated bank. The allocation would range from 7% for a 30 year old investor to 15% for a more conservative 65 year-old investor. The cash allocations have initially drawn a skeptical reaction from some financial advisors. (For more, see: Which Robo-Advisor is Best for Financial Advisors?)
At the end of the day I suspect the efforts of all three of these major firms will be successful and will likely evolve based on new trends in the robo-advisor world, as well as the market’s reaction to their offerings. These firms are smart, successful competitors and they have the money and resources to get this right.
The Bottom Line
While the term robo-advisor might sound homogenous the reality is that their services and the costs of those services vary. Additionally, with the entrance of major financial services firms into the picture the services offered by existing and likely new players in this space will continue to evolve. (For more, see: What's Next for the Robo-Advisor Space?)