by Erin Lowry
What follows is a high-level overview of the offerings of five robo-advisors. Generally, you will answer a few questions about where you are in life (e.g., your age and whether you’re retired) and your goals, total assets, and risk tolerance levels, and then you’ll be guided to various portfolio options based on your answers. Typically, you will then be invested in ETFs from various brokerages such as Vanguard, Fidelity, Schwab, and BlackRock.
These descriptions and price ranges are from the summer of 2018. You should always check company websites for the most up-to-date information, especially as competition in the marketplace is likely to impact offerings and pricing models.
Also, keep in mind that you’re generally still charged the expense ratio for each individual fund. You may read “no trade or transaction fees,” but most of the time that’s after the expense ratio. The expense ratio isn’t charged by your robo-advisor, it’s charged by the fund specifically, so your robo-advisor isn’t benefiting from or absorbing that fee for you. It is in your robo-advisor’s best interest to put you in funds that charge the lowest-possible expense ratio, because an expense ratio eats away at overall returns.
Betterment
Digital ($0 minimum balance with a 0.25 percent annual fee)
Premium ($100,000 minimum balance with a 0.40 percent annual fee)
The Betterment Portfolio Strategy offers “a globally diversified mix of exchange-traded funds.” Both the Digital and the Premium options offer low-cost, diversified investment portfolios with automatic rebalancing, and tax-loss harvesting strategies. The Digital platform offers access to licensed financial experts, while Premium gets you unlimited access to CFPs and in-depth advice on investments outside of Betterment, like a 401(k) or real estate.
Wealthsimple
Basic ($0 minimum, 0.5 percent fees on $0–$99,999)
Black ($100,000 minimum, 0.4 percent fee)
Wealthsimple also uses ETFs that track the global economy. Both levels offer auto deposits, rebalancing, tax-loss harvesting, dividend reinvesting, personalized portfolios, and human financial advice via call, text, or email. The Black level offers all the Basic-level features plus goal-based planning, dedicated financial planning, and increased tax efficiency.
Ellevest
Digital ($0 minimum balance, 0.25 percent annual fee)
Premium ($50,000 minimum balance, 0.50 percent annual fee)
Private Wealth Management ($1,000,000 minimum balance with an annual fee based on assets under management)
Ellevest is run by women and geared toward women investors, but you don’t have to be a woman in order to invest with Ellevest. It typically uses ETFs to help you build your portfolio. The Digital offering provides personalized investment portfolios with the option for automatic deposits, no-penalty withdrawals if you want to take your money out of Ellevest, automatic rebalancing, Ellevest’s own tax-minimization methodology (tax-loss harvesting), and unlimited support from the Ellevest concierge team, which includes financial professionals. The Premium offering includes all the Digital perks plus one-on-one access to CFPs for personalized guidance and one-on-one access to executive coaches for help with career moves and negotiation.
Wealthfront
0.25 percent annual advisory fee for everyone
Wealthfront doesn’t promote the use of financial advisors the same way some of its competitors do. It seems to lean in to the “robo-advisor” moniker a bit harder than its competitors by really focusing on the software and not adding a human touch. Even a philosophy on the homepage is “Technology can do some things better than people. We use software to better execute time-tested investment strategies.” Like its competitors, Wealthfront focuses on goal setting, determining your risk tolerance, and then building a well-diversified portfolio around that information.
Swell
0.75 percent annual fee, $50 minimum account balance
Swell is a slightly different offering from your average robo-advisor because it focuses specifically on impact investing. At the time of this writing, you can choose from seven different portfolios: Green Tech, Zero Waste, Disease Eradication, Clean Water, Renewable Energy, Healthy Living, and Impact 400. It’s a solution for those who want to invest but don’t want their money going toward companies they feel engage in unethical practices. You can learn more about ethical and impact investing in chapter 10.
CAN’T I JUST DO IT MYSELF?
“Hold up, you mentioned in the last section that the robo-advisor would be investing me in Vanguard, Fidelity, BlackRock, Schwab, and the like,” you might be thinking. “Couldn’t I just cut out the middle man and do it myself?”
Yes, you could. But even though you could, it doesn’t mean either that you should or that you’ll want to take on the task of being a DIY investor.
“Do-it-yourself can work when you’re ready to learn a bunch about what you should be doing, are ready to spend the time to execute that, and are ready to learn about what messes people up as humans looking at the behavioral finance side of it,” says Benke. “You may know you have to pick three funds across broad categories, rebalance at least once a year, and make sure you’re saving enough generally, but do you always rebalance? Do you look at the market before you rebalance? Do you look at fund level performance and try to decide if you should’ve picked that Vanguard Total International Fund or maybe now you should switch to the Schwab Total International Fund? There are a lot of factors that still come into play, even though people try to boil down the overall index fund strategy as simple and easy enough to do it yourself.”
IS IT SAFE TO USE A ROBO-ADVISOR?
“Definitely safe as long as the firm is SEC and FINRA registered and has SIPC insurance, which all the firms are basically required to have,” says Benke. “The common worry is that the firm is newer and will fold, and then what happens to my money? It’s different than a bank folding, because you’ll get the shares back and just have to put them in another, less fancy account. If the firm went out of business but you’re the beneficial owner of those shares, you would just in-kind transfer out.”
Benke also acknowledges that higher-net-worth individuals sometimes express concern over another Bernie Madoff situation resulting from investing with a robo-advisor. Bernie Madoff is a former investment advisor who ran the biggest Ponzi scheme in Wall Street history, which lost his clients billions of dollars. The fear is that when a robo-advisor tells you that you have X amount of money invested, how can you be certain the money is actually there?
The fallout from the Madoff Ponzi scheme really did change regulations in the financial world. “We’re required to have third-party auditors that come in and check that the money that we have for our customers is actually what we say we have,” says Benke. “These surprise audits happen at least annually, and they’re on record at the SEC, so clients can go and download the results.”
THE PERKS AND PITFALLS OF USING A ROBO-ADVISOR
As with all investment choices, there are both pros and cons to using a robo-advisor.
Perks
Tax-Loss Harvesting
The term tax-loss harvesting gets thrown around a lot when you’re looking at robo-advisors. It’s a big selling point for why you should use a robo-advisor, but what the heck does it mean?
“Since investments that you hold can go up and down, we hold different kinds of them to diversify them together,” explains Benke. “When they go down, the IRS has a bonus for you where you can save taxes by effectively taking a deduction for losses. The way you take that deduction is you have to sell the investment. The trick is that you don’t want to be uninvested, either. So, when you sell the investment, you also want to buy back [a similar investment] to ensure you keep your portfolio in shape. So, tax-loss harvesting is just a fancy term for looking for losses and taking the deduction to save you taxes.”
It makes sense why robo-advisors tout their practice of tax-loss harvesting as an advantage, because you won’t want to spend your time scouring your investments for tax-loss harvesting opportunities if you’re a DIY investor.
Rebalancing
“Emotion is something we want to get rid of,” says Nugent. “We believe over time, markets will revert back to the mean. So, let’s look at the history of the US markets—the S&P 500 returns 7 to 9 percent on average. The problem is ‘average’ never actually happens. It’s usually higher returns and lower returns. If you’re getting double-digit returns, history would say that at some point you’re bound for a correction and a reversion to the mean. The same thing happens on the downside. If the market is negative for a bunch of years, history would show that at some point, people are going to look at it and say, ‘Things are on sale, and we’re going to go buy some.’
“But in the moment, when you look at all the headlines, they’re usually scary on the downside or really exciting on [the] upside. People typically don’t rebalance. What you end up seeing is people will hold their losers for far longer than they should and sell their winners prematurely. The idea is to systematize the logic around rebalancing and always be disciplined around when you’re going to trim off something and buy more of something else. So, we automate that process for our clients.”
Protecting Your Portfolio from You
Remember risk tolerance back in chapter 3 and how it’s important to protect your portfolio from yourself? Well, robo-advisors provide a buffer between you and your investments. Granted, you can always get in there and tinker with and even liquidate your investments if you’re really panicking during a market correction, but maybe using a robo-advisor will be enough to prevent you from getting hyper-emotional when seeing a dip in the market.
Pitfalls
Fees
You’re going to be paying a fee if you want any level of customized financial advice. That’s completely reasonable. Fees themselves are not the issue. The issue is whether you’re actually getting the value you should for the fee you’re paying. Not all robo-advisors are created equal, so it’s up to you to do the due diligence and determine if your fee is worth the value you’re getting.
Personalization, to a Point
Unless you’re coming to the table with at least one significant comma ($100,000), you’ll likely get a rather generic version of personalized finance, with calculators and algorithms building a portfolio based on the questions you answer when you sign up. Robo-advisors will continue to evolve and tweak offerings, but it’s not far-fetched to think you’ll need at least $100,000 to get higher-quality service with more customization. Double commas will get you much more attention!
You Like Being Really Hands-On
You just may be a natural DIY person, and that’s okay. You certainly can be hands-on with your robo-advisor if you want, but it does come back to that question of value. Why are you paying the fee, then?
You Want a Long-Term Relationship
“We’re big believers in being able to speak to someone who is qualified,” says Nugent. “But I don’t think it’s something that necessarily needs to be done on a full-time basis, at least for the average person.”
Many robo-advisors do provide access to financial advisors and, in some cases, CFPs, but the latter usually depends on your assets.
“What if you have a good advisor over the phone, but they get promoted or leave?” poses Douglas A. Boneparth at Bone Fide Wealth. “Maybe you poured your life situation out to Jim, and then call later to find out that Jim has been replaced by Kim. Jim took terrible notes, and now you have to start all over with Kim.”
While many robo-advisors do provide humans to give you financial advice, it doesn’t always mean developing a long-term relationship with an advisor. While you could also lose a financial advisor at a traditional brokerage firm, too, they often are better at coordinating a hand-off because you’ve had a long-term relationship with one specific person.
WHEN ARE YOU READY TO USE A ROBO-ADVISOR?
The typical Betterment customer, according to Benke, is around thirty-seven years old, is getting further along in a career, and earns around $100,000. His or her financial situation may be starting to get a little more complex, so he or she decides to outsource instead of going the DIY route.
Nugent describes a typical Wealthsimple customer profile in a similar manner. “[They are] very, very concentrated on their career and doesn’t have time necessarily to do this themselves or, frankly, maybe doesn’t trust themselves to do it themselves.”
However, you don’t have to be a “typical customer” in order to start. Since there is a plethora of robo-advisors with no minimum account balances required, the door is open for you to take advantage before you’re well established in your career or have a high net worth. You just need to be sure to have checked off all the boxes in chapter 1 indicating that you’re in a financially healthy position before you start investing. Or, you can also turn to a robo-advisor to help with retirement planning, especially if you don’t have an employer-sponsored plan.
“Any investor who has any sort of meaningful debt should pay that off,” says Nugent. “Someone needs to have the right time horizon. We say at Wealthsimple, if you’re investing for less than three years, you need to maybe just look at something that’s guaranteed like a cash equivalent. We want people thinking long-term because what happens month-to-month and year-to-year is unpredictable.”
As always, be sure you do the math on fees before you start. You want to be able to invest enough that the benefit outweighs the cost of using a robo-advisor.
THE BROKERAGE I ALREADY USE OFFERS A ROBO-ADVISOR
Not to be one-upped, many brokerage firms have started to offer their own versions of a robo-advisor. Vanguard, Fidelity, and Charles Schwab are all examples of well-established brokerage firms that have launched robo-advisors with varying levels of functionality and capability.
However, just because the company you’ve been using to do your ETF or index fund investing offers a robo-advisor tool doesn’t mean it’s the one you should use.
It comes back to what you want from your robo-advisor and how it’s adding value. In some cases, you may find that it makes sense to level up from investing solo to getting customized advice from a company you already trust. In other cases, you might look under the hood and see that the brokerage just slapped together a robo-advisor option to compete in the marketplace and try to attract more Millennials to its services. Another consideration: you’re likely to only be investing in that brokerage’s funds. Going to a robo-advisor like Betterment, Wealthsimple, or Wealthfront means they’re looking for the lowest-cost funds at all the major brokerages.
Again, I’m not saying it’s a hard no. You just need to do your due diligence to decide if it’s actually best for you and makes your life easier.
IS IT TIME TO SPEAK TO A HUMAN?
Technology can only take you so far, and eventually it just may be time for you to speak to a human.
You should speak to an advisor “whenever you have questions you can’t answer or need confirmation,” advises Benke. “There’s also another end, which is if there’s a lot of complexity. You have many different types of financial goals, also you own a house, you work in two states, you have lots of kid-related expenses from day to day to long-term saving for college, your tax situation is complicated with different deductions, dependent care, transit, maybe a small business on the side. There are lots of things that make the picture more complicated and make it even more compelling to talk to somebody.”
In some cases, you can reach a human via your robo-advisor, but you may also have concluded that you’d prefer an ongoing personal relationship with a financial advisor. If that’s the right fit for you, then here’s what you should know.
What You Need to Know About an Advisor
Does he/she uphold fiduciary
or suitability standards?
Fiduciary means your advisor does what’s in your best interest, not just what is suitable.
How does your advisor get paid?
Fee-only simplifies the relationship. If your advisor takes a commission, you should know when and if that impacts what he or she puts in your portfolio.
What are your advisor’s credentials?
A CFP, or certified financial planner, is really the gold standard, but not a requirement. If your financial advisor is not a CFP, you should still ensure he or she is a fiduciary and ask about credentials and experience.
You Need to Feel Comfortable
“Go into that first conversation understanding it might not work out that first go-around,” says Kelly Lannan, director, Fidelity Investments. “Go in with the highest hopes, but at the same time, know that it might not stick and you have to be okay with that. You have to go in with specific questions in mind. You have to be very honest about your situation. After the fact, reflect on that conversation and ask yourself if this is the person to help you or do you want to speak to someone else.”