Who should be putting together your portfolio in 2015—a
person, a machine or both? It used to be a straightforward job to get help
making investments: People sought out financial advisers and weighed them based
on the type of fees they charged and how much hand-holding they provided
clients.
Now the choice has become more complicated thanks to “robo
advisers,” or online services that suggest custom portfolios based on
algorithms. There are also mixtures of old and new, with some traditional
advisers beginning to offer computerized portfolio tools. Indeed, some experts
think a substantial number of investors will be wary of giving up the human
touch entirely.
Here’s what investors need to know about how to choose in
this rapidly changing field.
Traditional Advisers:
High Costs, But Plenty of Hands-On Service
Let’s start with the most traditional setup: a real-world
financial adviser. This arrangement is designed for people who have a lot of
assets and need significant help with—or frequent dialogue about—their
investments and personal-finance goals. Advisers who work on commission or
charge a percentage of assets under management often require clients to have at
least a six-figure account. Those who work on fees (“fee only” advisers) can
charge around $100 to $400 per hour to devise an initial plan which could cost
a few thousand dollars and then several hundred dollars for periodic checkups.
Others charge a percentage of assets that can vary, but which often runs in the
1% to 2% range.
The promise (but by no means guarantee) with traditional
advisers: much better research than most investors could do and better
performance than they could get by picking on their own, plus attention to
financial details beyond the portfolio. Fee-only advisers, because they don’t
make commissions or make trades for an investor, can also claim that their
advice is unbiased.
The Robots: Low
Costs, But You’re on Your Own
The big catch with the traditional adviser structure is that
it typically can freeze out investors who are just getting started or don’t
have substantial assets. Robo advisers cater to that crowd, as well as to
more-experienced investors who don’t want the face time or fee structure
associated with a traditional arrangement.
Robo advisers ask for a range of information about customers
and then let their computers come up with the best portfolio to fit their
needs. There is semicustomized portfolio guidance, but none of the
comprehensive services real-world advisers provide.
The costs and minimums, though, are usually far less than
traditional advisers. At least one big
name is also planning to enter the field: Charles Schwab Corp. in
October announced that during 2015 it will unveil a robo-adviser service,
Intelligent Portfolios. Available to investors with as little as $5,000
invested, it will offer technology-driven portfolios representing 20 asset
classes and that feature daily tech monitoring and rebalancing.
Something else to consider: While a robo adviser’s
recommended portfolio may have a smart design behind it, the robo adviser may
not analyze factors beyond basics such as risk tolerance, age and assets. A
robo adviser offers portfolio recommendations, not big-picture financial strategies.
Hybrids: For Those
Who Aren’t Ready to Go It Alone
But the robots have a long way to go before they take over
from their flawed creators. Studies show that investors still often want a
human to talk to, such as when the market is bearish. So, the advising field
seems to be headed into a Venn diagram where human and tech services intersect.
Robert Laura, co-founder of Brighton, Mich., launched an
investment platform called Do It Together (DIT, for short) two years ago. DIT
clients meet with advisers, then execute their own investment trades either
using Synergos models or a variation on them; advisers have view-only access to
the client’s portfolio and can weigh in as needed. The onus is on the client to
watch the market and the economic outlook. But they control their money—which
is what they want.
The majority of Synergos clients still work under a
traditional advising model, handing over their money to an adviser to invest
and manage for a fee ranging from 1% to 1.25% of assets. DIT clients pay a fee
that is one-quarter of a percentage point less—0.75% to 1%.
Investors who want only occasional guidance are also seeing
new human options beyond the model of the traditional adviser. For instance,
this year Vanguard Group—the mutual-fund company known for its hands-off,
low-cost index funds—will formally roll out its Personal Advisor Services
offering, which matches investors with a salaried Vanguard adviser who works
with them remotely (phone, chat or email) on goal setting and portfolio
management.
During its pilot phase last year, the service was available
to investors with at least $100,000 invested; investors pay an annual 0.3% fee
on their balance.
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