Here's the top-level portfolio comparison:
|Firm||Equities Highlight||Bond Overview|
|Wealthfront||Investment committee||Least risky munis|
|Betterment||Marketlike||Munis & International bonds, riskier|
|FutureAdvisor||Small Caps and Value||Taxable, Low interest rate risk|
|Covestor||Emerging Markets||Taxable, Medium risk|
|WiseBanyan||Growth||Taxable, High interest rate risk|
|Invessence||U.S. focus||Riskiest, but diversified|
Costs & Efficiencies: Sometimes The Deciding Factor
If my son likes more than one of these approaches, he might look at costs and services as a tiebreaker.
Robo-advisor costs involve more than just the headline fees. Taxes, trading fees and tracking error also play a role. Some offer services such as asset location, tax-loss harvesting, rebalancing, cash flow management and automated savings plans. A quick cost/benefit review will help us evaluate each package.
All the robo advisors post their management fees. That's the easy part.
Most cover brokerage fees, but FutureAdvisor and Covestor don't. We'll account for that.
There's more, though. Taxes and tracking error can add up fast. Taxes are personal, but tracking error isn't. Tracking error comes in two flavors: drag between a fund and the index it tracks; and portfolio gaps and overlaps. The drag is easier to measure, so we'll focus on that first.
ETF.com calculates the median 12-month returns difference between a fund and the index it tracks. You'll see the portfolio weighted average tracking differences in the table below. Invessence's choices of Market Vectors Long Municipal (MLN │ C-94) and the SPDR Barclays High Yield Bond ETF (JNK │ B-77) pushed up costs.
|Firm||Weighted Average Tracking Difference|
Gaps and overlaps can hurt too. If Invessence had used the U.S.-focused Vanguard Total Stock Market ETF (VTI | A-100) instead of the SPDR S&P 500 ETF (SPY │ A-98) and the iShares Russell 2000 ETF (IWM │ A-78), its 60/40 clients would have pocketed an extra 0.69 percent per year from the beginning of 2012 (Invessence's launch year) through Sept. 15, 2014.