4 Things To Know About ‘Robo-Advisors’

April 17, 2014

1. They are very low cost, but you need to know what you’re getting for your money.

Investors are keenly aware of costs, particularly since the 2008 credit crisis wiped out so much wealth. They want to pay as little as possible for financial advice as well as for investment vehicles.

Robo-advisors do a stellar job in this regard. Again, Wealthfront’s all-ETF platform, for instance, charges 0.25 percent a year in fees, and thanks largely to that low-cost appeal, the firm has quickly grown to manage more than $800 million in total assets. The firm also offers the service free of charge for accounts under $10,000.

If you go to a traditional flesh-and-bone advisory outfit like Buckingham Asset Management, for example, you would be paying 1.25 percent a year in a tiered schedule that goes down as assets grow. That’s not a negligible difference, particularly if you’re subscribing to a passively managed all-ETF portfolio.

But costs can’t be taken in a vacuum—what you’re getting for your money should be a consideration, Goldberg, of BAM Advisors argues.

“If people’s expectations of what they can get from a financial advisor were higher, these service providers would have less of an appeal,” Goldberg told ETF.com.

“Investors would not be necessarily looking for the lowest-cost solution,” he added. “So many people have such low expectations of what a wealth advisor can provide that advisors really end up looking like a commodity. But in the end, not all wealth advisors provide the same experience.”

Goldberg argues that a true financial advisor acts like an investor’s personal CFO, fulfilling a task that goes well beyond portfolio construction such as accounting and tax advice, but consists of a holistic approach to wealth management that’s worth the cost.

 

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