Editor’s Note: The following article was republished with permission from Big Law Investor.
In case you’re not familiar with the term, roboadvisors are part of a new wave of FinTech companies that offer a computer-based and automated service which provides a variety of investment advisory management and services for a fee.
Thanks to their automated nature, roboadvisors charge substantially less in fees than a traditional financial advisor. Additionally, roboadvisors will work with you when you have a small account balance unlike some financial advisors that want to see $100,000 in the bank before they’ll even begin to talk to you.
There are a few main reasons I’ve never invested money with a roboadvisor:
Managing Investments Is Easy
Distinct from providing investment advice, the day-to-day management of investment accounts isn’t really that hard. There’s very little to do and rebalancing your accounts on an annual or semi-annual basis isn’t likely to take up much of your time. In fact, managing an investment account is substantially easier than just about every other financial aspect of my life, such as understanding PSLF, estate planning, disability insurance, figuring out which retirement accounts to use, etc.
Very Little Financial Advice
There’s only so much financial advice a robot or platform can give you. For the roboadvisors, this is usually limited to providing a suggested asset allocation based on your savings goal or risk assessment. These types of asset allocations are helpful but can’t be a substitute for doing the work yourself to understand your true risk profile.
Roboadvisors cost money. Even if the fee is only 0.3%, that fee comes directly out of your returns. A lawyer investing $50,000 a year for 30 years earning 8% interest will end up with nearly 6% more money than a lawyer investing the same amount but earning 7.70% interest ($5.66 million vs $5.36 million). That means the do-it-yourself investor will also end up with retirement income that’s 6% higher.
If you have a roboadvisor that’s performing tax-loss harvesting for you, forget about trying to do any tax-loss harvesting yourself in a separate account. Unless you are investing in completely different funds, it’ll be impossible for you to keep up with the transactions to avoid the wash-sale rules.
And speaking of wash-sale rules, if your roboadvisor is tax-loss harvesting in a taxable account while you are making regular contributions to a retirement account, you’re also likely running afoul of the wash-sale rules if your retirement account contains the same funds that are being tax-loss harvested by the roboadvisor.
Fee vs Services
At the end of the day, the question always comes down to whether the service is worth the fees. Only you can determine this, since it’s your money that’s being spent on the roboadvisory services. Based on my review, you could do a lot worse than a roboadvisor.
If you’re not convinced that you should handle your investments yourself, there are some real benefits to using a roboadvisor that may outweigh the bad.
The roboadvisors are providing a service. It mainly consists of asset allocation, tax-loss harvesting, portfolio design and automatic rebalancing. Even if you could perform these tasks yourself, lawyers are a busy bunch and a roboadvisor will handle it automatically for you. Further, by letting a roboadvisor handle this automatically you’ll reduce your own desire to fidget with the account and numbers. Set it and forget it.
Roboadvisor portfolios are actually pretty sophisticated. They generally purchase broad index funds from low-fee providers such as Vanguard. You could do a lot worse than use a roboadvisor’s portfolio. While relying on a roboadvisor’s portfolio isn’t an excuse for understanding the underlying investments, I’m reasonably confident that you’ll be presented with good choices if you use a roboadvisor.
Low Fees and Low Account Balances
Sometimes just getting started is the hardest part of investing. Roboadvisors charge low fees and most will let you open an account with barely any money. Paying a 0.3% fee on a $10,000 balance amounts to only $30 a year. Nobody has gone broke paying a $30 annual fee and if a roboadvisor is the gateway for you to get started with a taxable account and to learn about investing, it’s a great start. The problem is likely to come in the future when you’re still using a roboadvisor after having built up a six figure investment account but even then you may decide that the service is worth the fees.
Roboadvisors are Legit
As the roboadvisor movement has grown, the big names have all joined the club and you can now find roboadvisors with Schwab, Vanguard, etc. It’s pretty clear that the roboadvisors aren’t commissioned salesmen and that they have only relatively minor conflicts of interest. Roboadvisors aren’t going to disappear like a Bernie Madoff with your money and in fact are likely to be around much longer than your parent’s financial advisor that is offering to help manage your money.
Overview of Roboadvisors
There’s quite a few roboadvisors in the market today and it’s easy to see why. Given that the process is completely automated, these companies can deploy a tech force to build the backend and then rely on a small sales force to grow the overall balance of the assets under management.
When picking a roboadvisor, the same principles apply that you’d use to select any type of financial advisor: (1) calculate the costs and decide if the service is worth the fees; (2) understand what type of advisory services are offered; (3) can you talk to a live person if needed; (4) the online interface/technology; (5) the additional benefits, such as access to model portfolios, tax-loss harvesting, automatic asset allocation rebalancing, etc.
Wealthfront and Betterment are the two “big” roboadvisors battling it out in the marketplace to manage your money. For small accounts, it’s harder to do better than Wealthfront since it’s completely free for any accounts less than $10,000. For accounts greater than $10,000, Wealthfront charges a flat 0.25% annual advisor fee. Keep in mind that this fee is on top of the fees charged by the ETFs you will own (which Wealthfront estimates will be about 0.12%).
So what services do you get for your money? You’ll get the standard automatic tax-loss harvesting and asset allocation rebalancing that you’ve come to expect from roboadvisors.
There are a couple of unique features of Wealthfront, including what they call “Advanced Indexing” if you are willing to deposit more than $500K with them. Rather than using ETFs, Wealthfront will construct an index through purchases of underlying securities, thus increasing the tax-loss harvesting opportunities as well as reducing fees associated with the ETFs. If this sounds like something interesting to you, you’ll want to check out their white paper on the subject.
Wealthfront is definitely a good choice if you’re looking for a roboadvisor.
I have no affiliate relationship with Wealthfront.
Earlier this year Betterment changed its fee structure and moved to a flat 0.25% on all accounts up to $2 million. Everything above $2 million isn’t subject to the fee, effectively capping your total payment to Betterment at $5,000 per year (as with Wealthfront, this fee is in addition to any fees charged by the underlying ETFs used in constructing your portfolio). They’re calling this the Betterment Digital plan, which basically means you’ll only be dealing with their computers when it comes to tax-loss harvesting and any financial advice.
For a steeper 0.40% fee, you can the Betterment Premium plan which includes all of the services offered by the Digital plan plus access to certified financial planners if you want the human touch.