One of my favorite sci-fi movies is Arnold Schwarzenegger’s The Terminator. It’s set in a dystopian world that’s ruled by Skynet and robots who want to kill every human.
In some ways, we’ve already got a Skynet situation in the works, with Alphabet’s (GOOG) purchase of the robot firm Boston Dynamics. Not to mention the fact that we have high-frequency trading in which bots account for up to 80% of the daily volume on the stock market and can buy and sell stocks in microseconds.
Computers to aid with finance are already here.
So the question is: Can they help with your own investing?
Can computers replace humans and give sound financial advice? Previously, when investing, your choices were pretty limited.
- Do-it-yourself (DIY)
- Hire a financial investment advisor (FIA)
Historically, there’s been a problem with trying to get an FIA: Many have minimum asset requirements of $500,000 or more. These requirements put many FIAs out of reach for younger and lower-net-worth individuals.
So if you fell into this category, you had to fend for yourself or get generalized advice from a financial guru like Suze Orman (don’t get me started).
In addition, it’s not uncommon for FIAs to charge 1%–2% annually (or even more via the loaded investment products they push you into). That’s 1%–2% you have to do better than the market just to keep up. As history has shown, this is a steep fee to overcome, and in many cases, FIAs also came with substandard financial advice to boot.
Let’s also not forget that — if the investment advisor isn’t a fiduciary — they may not offer investments in your best interest but recommend investment products that best line their wallets.
If you went the DIY route, you might have found you aren’t cut out to go it alone. Gone are the days when everyone who retired automatically got a gold watch and a pension (which was managed by a professional). Today you are required to self-fund your own retirement.
401(k) plans and IRA accounts put you in the investment driver’s seat. But more than likely you haven’t read up on investment analysis. Worse yet, you may have poor investing psychology and jump out of the market at the absolute worst times (buying high and selling low).
What Is a Robo-Advisor?
There are many definitions of what exactly “robo-advisor” means. To put it simply, a robo-advisor is a method to automate the asset allocation of investments via a computer algorithm. In a broader sense, a robo-advisor may also include human financial advisors but only for services that require human assistance (e.g., taxes, retirement or estate planning).
Overall, I consider the rise and interest in automated investment services a “good thing,” pushing down the costs of high-fee Wall Street advisors that offered no real value and, if anything, were a drag on returns. This is a great thing in any competitive marketplace. In addition, these firms are helping individuals with goal setting and asset allocation — when they typically have no clue where to begin.
As with most anything, one size does not fit all when it comes to financial advice. I do see this space filling the need of most beginner investors and investors with uncomplicated financial portfolios.
But are robo-advisors right for you? That depends upon your net worth, the complexity of your investments and whether you feel comfortable enough to do it yourself.
I’m definitely not in the camp with those saying that these robo-advisors add no value and that you could easily replicate them yourself just by using Fidelity or Vanguard funds.
In my case, most of my family assets are DIY, but I’ve also been studying this for years and feel comfortable doing it — other individuals may not, and I get that. In full disclosure for purposes of reviewing and testing, I have accounts with Motif and Personal Capital.
Keep in mind what these firms are offering is not unique. A target date mutual fund has some similarities. All of these firms base their automated investment guidance using Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH) and a series of questions to determine your risk profile.
While this investment strategy isn’t perfect, it sure beats what most individuals have — which is nothing. It’s usually a hodgepodge of investments with no asset allocation, actively managed funds, high annual fees and whatever “investment du jour” their peers recommend investing in.
Firms like Wealthfront focus on the end goal and are ideal for individuals who don’t care or who don’t want to learn about the details of investing. For these individuals, the 25 basis points (otherwise known as a 0.25% annual fee) or less they pay is well worth the fee and in many cases much better than hiring an FIA — in terms of both cost and good financial advice.
The online tools robo-advisors offer aren’t new, though. Traditional financial advisors had the same tools available to them for years and could roll up a personalized asset allocation plan specific to you. Heck, this stuff was available in 1999 when I first used an advisor at PaineWebber. Like self-checkout at Home Depot (HD), this is pushing the technology down to the masses. You have direct access to manage your account, and it removes the no-value-added middlemen.
Let me be clear: Some financial advisors can add tremendous value. They can give guidance to the asset allocation best for you based upon unquantifiable factors, which computer programs can never do. But I believe this is more the exception than the rule.
Financial advisors can give recommendations about long-term life decisions (e.g., helping plan for a child’s education through a recommended action plan). In fact, some of the robo-advisors mentioned in this article are just tech-assisted firms and not 100% automated. If you want it, the human element is not completely removed from the loop with some of these firms.
There’s something to be said with any 100% algorithm-driven investment approach. While it might help with a high percentage of individuals, there are always cases in which automated guidance isn’t appropriate.
List of Robo-Advisors
|Charles Schwab Intelligent Portfolios||Automated||Full Review|
|E*TRADE Adaptive Portfolio||Automated||Full Review|
|Fidelity Go||Automated||Full Review|
|LearnVest||Human Assisted||Full Review|
|MarketRiders||Human Assisted||Full Review|
|Motif Horizon Models||Automated||Full Review|
|Personal Capital||Human Assisted||Full Review|
|Rebalance IRA||Human Assisted||Full Review|
|SigFig||Human Assisted||Full Review|
|Stash Invest||Automated||Full Review|
|TD Ameritrade Essential Portfolios||Automated||Full Review|
|Vanguard Personal Advisor Services||Human Assisted||Full Review|
|Wealthsimple||Human Assisted||Full Review|
Aren’t All Robo-Advisors the Same?
To the casual reader, the differences between firms might seem minor but in reality are not. You have a choice between:
- Minimum Deposit — With some firms you can start out with nothing, while others require sizable amounts to start.
- Annual Fees — Be aware of hidden costs and ETF fees a robo-advisor purchases on your behalf.
- Asset Allocation — Asset allocation can vary quite a bit based upon your age and the way you answer their risk assessment questions.
- Account Type Support — Do they offer individual, joint, IRA, etc.? Can the robo-advisor assist with your 401(k) plan?
- Automation — Some services are 100% automated vs. human-assisted advice.
- Tax Optimization — Services like Tax Loss Harvesting.
- Custody of Funds — Managed either by you, in which case they give trading advice, or directly by the firm.
- Management of Assets — Manage all your assets or just a portion.
- End Goal — Retirement-only or other goals (e.g., college education).
Out of all the services, Personal Capital is the most expensive but also has the most human interaction with its clients. It could be said Personal Capital is much more of a traditional financial advisor that uses technology to assist. Personal Capital’s fees also include trading fees, and it recommends mostly individual stocks to minimize expenses and taxes as well. So its true cost might be more in line with the other firms mentioned.
Cost is an important consideration in picking your robo-advisor. Be aware the robo-advisor fees are only for their services — they don’t include the ETF fees they purchase on your behalf. If you’re curious, I’ve researched the popular robo-advisors and broken down the true annual costs of each .
Should I Use a Robo-Advisor?
The ultimate question is: Should I use a robo-advisor instead of doing it myself, or should I use a traditional advisor? For many cases, yes, a robo-advisor is a solid choice.
A robo-advisor is a good fit if you:
- Are Young — with more than 20 years till retirement.
- Have a Simple Portfolio — no accounts with other financial services.
- Lack Investment Experience — unsure about where to begin.
They don’t cost much to use, and in my opinion, most create a decent asset allocation. These services will give you a good starting point.
As your needs change, you could always move your money to another financial service. By then, some of these same services will have advanced and might automate more of what previously required a human.
Are they perfect? No. It can be said, if you have the skills you might be better off rolling your own, or a target date fund is all you need. But then again, that’s not the audience these companies are targeting. They’re filling a niche in the investment advisory space that’s been ignored for years.
If you want estate planning or if you have issues that don’t fit the typical investment planning mold (e.g., you have a child with special needs), then you might be better off with a traditional advisor. Or a robo-advisor service that can help customize your asset allocation.
In my opinion, however, it’s no question robo-advisors are the future of the financial industry for the most basic advice.
Like how Vanguard revolutionized investing with indexed-based low-cost funds, robo-advisors are doing the same with asset allocation for the masses.
Want to learn more about robo-advisors? Sign up for my FREE robo-advisor boot camp.