There’s a lot of buzz on Wall Street these days about
investing technology and so-called “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 human beings trying to pick the best stocks, consistently underperforms
the market in general. Consider S&P Dow Jones Indices data through
2014 that show almost 89% of actively managed funds posted worse five-year
returns than a plain vanilla index like 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, because it requires
much less expense to manage the fixed list of stocks that make up the S&P
500 than to actively research and trade stocks based on complex strategies. 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 a recent analysis by brand research firm Market Strategies International.
Of course, that means a scramble among new providers to
enter this marketplace. And as is typically the case when ambitious firms with
big marketing budgets fight for attention, consumers aren’t always sure 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 like you.
Fully Automated
Robo-Advisers
The most obvious benefit of a digital investment adviser is
the reduced cost. Take leading robo-adviser 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
over $100,000. That’s significantly cheaper than the 0.64% charged by the
typical mutual fund or ETF, according to a recent fee study by Morningstar.
But Jon Stein, founder & CEO of Betterment, is quick to point out that
the savings come from best-in-class technology, and not from overly simplistic
financial advice.
Consumers don’t see all the complex algorithms and
“gross stuff” on the back end, he notes, because “we’ve put advice at our
core.” But investors can have confidence that Betterment is offering very
prescriptive advice on how much to save and where to invest based on the
personal goals they’ve provided. These include big-picture goals like 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 in assets. 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.
Technology With a
Human Touch
Given the growing popularity of these high-tech investing
algorithms, there will only be more options as time goes by. But as with any
financial service, consumers should shop around for the best deals and find the
product that best fits their needs. 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.
Traditional brokers have “incentive structures to sell
whatever they make the most money on,” Harris said, and consumers are right to
be skeptical of that model. But “a Personal Capital adviser, a fiduciary, has
the legal obligation to do what’s in the client’s best interest and does not
take back-end fees or anything else.”
One of the biggest names in retirement planning, The Vanguard
Group, also sees tremendous opportunity in marrying digital products with human
advisers. Vanguard has some $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 very beginning to set your personal goals, then using sophisticated
digital services to keep you in the know as you save.
Frank Kolimago, principal at Vanguard Personal Advisor
Services, said those who only know Vanguard as a provider of low-cost mutual
funds shouldn’t be surprised it has a robo-adviser service. 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.
But interestingly enough, Kolimago doesn’t worry at all
about losing business to the other robo-advisers that are catering to investors
with fewer assets by waiving fees or offering low minimum accounts. That’s
because many of these firms are actually Vanguard customers themselves, using
the investment group’s low-cost mutual funds and other products to serve their
clients.
No matter what your platform, the benefit of keeping
costs low for individual investors with high-tech tools is one thing that all
these firms can get behind.
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