4 Things To Know About ‘Robo-Advisors’

By
Cinthia Murphy
April 17, 2014
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Online financial advisories show promise, but have yet to face the test of time.

The so-called robo-advisory business is quickly growing, and it’s easy to understand the appeal of automated portfolio construction and management for a very low cost. This type of log-in, answer-a-survey, get-your-portfolio-underway type of experience has attracted millions of dollars from investors of all sizes. But there are risks that need to be understood.

Firms like Wealthfront and Betterment are some of the biggest names in a space that’s populated by at least a dozen firms. The segment came into the spotlight this week after reports surfaced that Vanguard—the largest mutual fund provider in the world and the third-largest ETF provider in the U.S.—is joining the robo-advisory industry.

A Vanguard representative told ETF.com the firm is still working out the details of its program, which is called “Personal Advisor Services,” and therefore cannot comment further other than to say it sees this program as an “evolution in our planning and advice services, resulting from what we’ve learned during our near three decades in the advice business.”

Vanguard Vs. Wealthfront Vs. Betterment

But the New York Times reported that Vanguard’s service will cost 0.30 percent a year in fees—$30 for each $10,000 invested. It will also require an initial investment of $100,000—a threshold the Times reported might eventually drop down to $50,000.

By comparison, Wealthfront charges 0.25 percent a year in flat fees—or roughly $20 a month for an account of $100,000 invested—but doesn’t charge a dime for investments under $10,000.

Betterment, meanwhile, has a tiered fee schedule that’s based on total assets. It ranges from 0.35 percent a year for balances of $100 to 0.15 percent a year for accounts of $100,000 or more. That’s $150 a year per $100,000 invested.

Both firms also allow investors to “roll over” 401(k) accounts to their platforms, meaning the “qualified” nontaxable status of assets in 401(k)s will be preserved in individual retirement accounts (IRAs).

Doubts Along With Excitement

But the jury is still out on whether robo-advisors represent the future of investment advice, or if they can even survive in their current iteration.

Passive-investing advocates such as Allan Roth, of Wealth Logic, see robo-advisors as an important step forward for investors of all sizes. Among the benefits these providers bring to the table, Roth points to cost advantages, tax efficiency and automated platforms that should help protect investors from, well, themselves.

“My industry—the financial planners and advisors—see robo-advisors as a huge threat,” Roth told ETF.com. “I see them as a huge opportunity for investors.”

Focus On Cost Can Be Detrimental

The naysayers worry that the excessive focus on costs is not only detrimental to investment outcome over time, but also to the firms themselves, which may not make enough profit to even survive.

“The appeal of companies like Wealthfront to the next generation is as much cost as it is convenience,” Joe Goldberg, wealth advisor with BAM Advisors, told ETF.com. “To set up an account, you watch some online videos and you can do it in a matter of minutes. Going through a full process with an advisor takes time.”

“Unfortunately there are a lot of people who aren’t willing to invest the time even if it could make a significant difference in the amount of wealth they are going to have,” he noted. “They put more value on their immediate time.”

As an investor, here are four things you should know about robo-advisors in general, and what they can mean for your investment experience.

 

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