Which Robo Advisor For My Teen?

August 18, 2014

Start talking with your kids about investing their own money.

My husband and I recently sat down with our son, 13 years old and newly flush with bar mitzvah money. It wasn't long before someone mentioned the robo advisor—the new breed of automated, online asset allocation and investment management services that offer all-ETF portfolios.

These services offer cheap asset allocation and fund selection, with rebalancing, tax-loss harvesting and other services. Some are even completely free. Why not recommend this cutting-edge solution to our 13-year-old young adult?

Because I don't make any investment recommendations, no matter how small the pile of money, before I've done my due diligence. Tag, I'm it.

Existing robo-advisor media coverage hasn't been very helpful in terms of due diligence. So far most of the chatter has been around their disruptive business model, focusing on questions like whether robo advisors will drive human advisors out of business.

But what about the thing that matters most over the long term—the actual portfolio? Really, that's what drives long-term returns. And for a 13-year-old, the long term could be very long indeed.

Asset allocation, fund selection and portfolio maintenance are the heart and soul of investing. Get it right, and you'll have a comfy retirement—if you save diligently. Get it wrong—or fail to save enough—and you'll be eating cat food, as Bill Bernstein pointed out in a recent interview on ETF.com. Your investment selection can make the difference between community college and Stanford.

So I asked six ETF-only robo-advisor firms to send me two portfolios each: a very aggressive 90 percent equity/10 percent fixed-income allocation, and a more traditional 60/40 split.

I explained to each firm's chief executive officer or chief investment officer my intent: to use ETF.com's ETF Analytics tools to analyze and compare each of these portfolios in order to help investors understand the risks, rewards and philosophies of each, and to choose the one most appropriate for them.

The 90 percent equity portfolio—from any of the six—would be suitable for investors who prefer to manage their fixed-income separately. Residents of California, New York and New Jersey won't find robo portfolios offering state-specific municipal bond funds—not yet.

Anyway, I dare say, my bar mitzvah boy probably doesn't need fixed-income exposure. Not in middle school, anyway.

The 60 percent equity portfolio fits the classic "moderate risk" allocation. Many of us old fogies will appreciate a peek under the hood of the fixed-income suite, and a gander at a less edgy equity allocation.


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