I am asked about five times a week to write a post about Roboadvisors. I have written a little about them in the past, and even had a guest post about them, but haven't really gotten around to doing a huge write-up about them due to a lack of time and interest in doing the research required to do a really good post on them. You need to be aware that I have an affiliate agreement with some of these, so if you open an account from links on this page, I could make some money.
What is a Roboadvisor?
First, let's define the term. Probably the easiest way to define a roboadvisor is that they are a computer-based, automated service which performs “cookbook” investment management for very low fees and a very small account size.
Why Should I Avoid A Roboadvisor?
There are three main reasons I don't like Roboadvisors.
- No Financial Planning. In my view, the biggest bang for your buck in the financial advising world is the financial planning aspect.
- Investment Management is Easy. Among the myriad of financial tasks an individual investor is called upon to do, I think the investment management piece is the easiest. It is far easier than student loan management, estate planning, asset protection, disability insurance, practice retirement plan design, and figuring out which retirement accounts to use. I see it as a very small leap from hiring a roboadvisor to doing it yourself. If you're the kind of person who wants or needs a full-service advisor, a roboadvisor isn't going to cut it.
- 0.3% is 0.3%. There is a cost to hiring a roboadvisor, and that fee comes directly out of your returns. Over the course of 30 years, even a very low fee like 0.3% adds up. Consider a doctor investing $50K a year and earning 8% a year by himself, or 7.7% with a roboadvisor. You retire with 6% more ($6.12M vs $5.77M) assets (and thus a retirement income 6% higher) by doing it yourself.
- Can't Handle Many Accounts. While most will do a taxable account, an IRA/Roth IRA, and maybe even a SEP-IRA, forget it if you need help melding your 401(k)/profit-sharing plan, individual 401(k), defined benefit plan, Backdoor Roths, HSA, and taxable accounts together. And if you have to either manage those yourself or hire someone else to do so, why not just do that with your whole portfolio?
Benefits of Roboadvisors
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Not convinced to do it yourself? Fine, let's take a look at what you can get by hiring an advisor. Here are the main benefits:
- A Good Enough Portfolio. A roboadvisor portfolio might not be personalized, but the truth is you probably don't need a personalized portfolio. Roboadvisor portfolios are good enough, and many of them are surprisingly sophisticated. The vast majority of portfolios that investors hold out there are far worse than all of the roboadvisor portfolios.
- Automated Portfolio Management. One real benefit of having an advisor, even if you are a sophisticated investor capable of doing it on your own, is that you don't have to do the tasks of investing. These include rebalancing, tax-loss harvesting, portfolio design, individual investment purchases etc.
- Low Fees. While I do know of investment managers with very low fees, the fact is most of them aren't doing anything that is very different from what the roboadvisors are doing. While 0.3% is 0.3%, that's a fraction of what you'd pay the average advisor to manage your money.
Best Roboadvisors. Which Advisor to Choose?
There are tons of roboadvisors out there now, and it's easy to see why. The business is essentially automated, and just like any advisor business, the more assets you gather, the more money you make. When choosing, pay attention to fees, the model portfolios, the additional benefits (like tax-loss harvesting), the online interface, and the ability to talk to a real live person if you need to.
Betterment
I've had an affiliate agreement with Betterment for over three years now (I get paid $29-142 if you open an account through the links on this page.) I don't think I've ever convinced more than 1 or 2 readers to use their services, which is too bad. I'm sure they're right for a lot of people. As roboadvisors go, they may be the top of the list. At 15 basis points, they're certainly the cheapest. I pay more than that in 529 fees in one of the best plans in the country.
- Minimum investment: $1
- Fees: 0.35% for an account < $10K with $100 a month auto-deposit, 0.25% for $10-100K, and 0.15% for >$100K
- Portfolio: Vanguard and iShares ETFs
- Extra features: Automatic tax-loss harvesting
I like the low fees (0.15% is dirt cheap investment management), the use of excellent funds I use anyway, and the tax-loss harvesting if you have a taxable account with them. In general, people prefer their computer interface to that of their main competitor, Wealthfront.
Wealthfront
I have an affiliate agreement with these folks too ($50 if you open an account.) They're another great option, especially for a tiny account (since it's completely free.)
- Minimum investment: $500
- Fees: $0 for less than $500-10K, 0.25% for > $10K
- Portfolio: Vanguard, State Street, iShares ETFs
- Extra features: Automatic tax-loss harvesting, tax-optimized direct indexing.
Wealthfront gives Betterment a run for their money. While Betterment has a lower minimum, that shouldn't matter to readers of this blog. Fees are very similar, although technically lower for Betterment once you're over $100K. One unique thing that Wealthfront does (and Betterment doesn't) is their “tax-optimized direct indexing.” Basically, in a taxable account over $100K they're buying the US stocks individually rather than just the US stock ETF. This helps you have more tax-loss harvesting opportunities. They buy you 100 stocks for an account of $100-500K, 500 stocks for an account of $500K-1M, and $1000 stocks for an account of over $1M. Whether that is worth an extra 10 basis points in fees, well, the jury is still out. But if you like the sound of that, you may like Wealthfront better than Betterment. Certainly both are excellent choices.
These two companies are obviously the heavyweights in the business and are clearly competing with each other. There are a few other minor differences in portfolio construction that shouldn't matter much to you if you'd consider hiring a roboadvisor. These includes Betterment's use of value funds and treasury bonds and Wealthfront's use of REITs and commodities.
Motif Investing
I've had an affiliate agreement with these guys in the past. They fit in nicely to this post. They're a little different from a typical roboadvisor in that they're a bit more DIY, but are similar enough that you can use them the same way.
- Minimum investment: $300
- Fees: $9.95 a trade
- Portfolio: Any ETF or individual stock you desire
- Extra features: Design your own motif/portfolio
To understand Motif Investing, first you have to understand what a “motif” is, or can be. A motif is a collection of up to 30 investments, which can essentially be your entire portfolio of 3-15 ETFs. Motif investing lets you buy the whole kit and kaboodle for one $9.95 fee. So once a month you buy some shares in all ten of the ETFs in your portfolio, and all it costs you is $9.95. Pretty cool, right? For $120 a year, you're good to go. If you don't want to design your own motif, they're got some pre-designed ones that are just fine, including the 7Twelve Portfolio, the classic Boglehead 3-Fund portfolio, and the Ivy League/Yale Portfolio. You'll quickly see that Motif also provides a valuable service to many speculators, but if you're in that category, you're probably not reading this article about roboadvisors.
Future Advisor
Guess what? These guys have an affiliate agreement with me too, but this one only pays me $10 if you open an account. These guys are kind of cool, in that they charge for retirement savings accounts, but NOT for college savings accounts. So if you want a roboadvisor for a college savings program, they may be your best bet.
- Minimum investment: $3,000
- Fees: Free for recommendations. Free for college account management. 0.5% of AUM for retirement account management after first three months (which are free.)
- Portfolio: Vanguard and iShares ETFs
- Extra features: Automatic tax-loss harvesting
Future Advisor's interface is generally liked. They also tend to use a significant small/value tilt in their portfolios. They are certainly a reasonable option, especially for college accounts or if you just want another opinion on a reasonable portfolio, but for 0.5% a year, you can get a live advisor so I see little reason to pay that much for a roboadvisor.
WiseBanyan
No affiliate agreement here. WiseBanyan's claim to fame is that they're the world's first free financial advisor (not counting the Bogleheads forum and me for those of you who send me lots of emails.)
- Minimum investment: $10
- Fees: None (kind of)
- Portfolio: Vanguard and iShares ETFs
- Extra features: Tax-loss harvesting (may now be free), tax prep, Backdoor Roths for additional fees
So what's the catch? How do they stay in business? Well, by selling additional services (such as tax-loss harvesting, tax preparation, and special “concierge” services like backdoor Roth IRAs or customized portfolio management at 0.5-1% a year.) They also have some brokerage type fees, like $100 to close an account. The other thing that's a little weird, is that because they're free, they have a waiting list. You can't just sign-up and start investing today. You can get off the waitlist sooner by inviting 5 friends to get onto it with you, but it sounds like it is a matter of a few days to get off it, no big deal. Bottom line: I love the price, but these guys are probably too new and too small for me to really recommend them yet, but keep an eye on them.
[Update 6/2016- The wait list is gone, minimum investment is $1 instead of $10, and they have a couple of apps and some new features.]
Blooom
The cool thing about Blooom is that they have an extra “O” in their name. Oh, and unlike most of these other guys, their role is to manage your 401(k), not your IRA and taxable account.
- Minimum investment: $1
- Fees: $12-180 per year
- Portfolio: Depends on what your 401(k) offers.
- Extra features: 401(k) management
One thing I really like about Blooom is that it is real live people running the service. There is a live chat feature, and a person checks in on your 401(k) holdings every 90 days. I also love that you don't have to open any new accounts-they just manage your existing 401(k). The main downside of Blooom is you probably need another roboadvisor too in order to do your 401(k) and IRAs. And then you're back in the position of either having different asset allocations in each account and managing them separately, or just doing it yourself. But if you're just starting out with a 401(k) and that's your only investment account, then I think Blooom is worth the $1 a month they charge.
Personal Capital
I have an affiliation with these guys ($100 if you invest the minimum $100K with them, nothing for smaller accounts). The main difference between these guys and everyone else is their relatively high minimum and their relatively high fees. The minimum is not insurmountable for most docs, and it's far less than many live advisors with $500K-$1M minimums, but it is 100,000 times the minimum at several other roboadvisor services.
- Minimum investment: $100,000
- Fees: 0.89% of AUM on the first million
- Portfolio: Individual stocks
- Extra features: Live advisor
Personal Capital is a bit like Mint in that it aggregates all of your accounts. It comes from the same folks who did Turbotax and Paypal. Most people think it does a better job with your investments than Mint does. Just using the website is free. But if you wish to have an advisor/wealth management services, you're going to have to pay. Unfortunately, the “roboadvisor” service costs more than many live advisors at 0.89% for the first million with a gradual decrease after that. To be fair, you do get a live advisor assigned to you, but I think you can do better with a more traditional advisor for that price, and hopefully get some physician-specific financial planning thrown in as well. Another thing I don't like about Personal Capital is their use of individual stocks. “We pick at least 60,” they say, but I don't think that's enough. These guys are more similar to a bad traditional advisor than to any of the other roboadvisors on this page, they're just trying to get the business of those between $100K in assets and those who qualify with most fee-only advisors at $500K-$1M. I guess I probably won't be getting very many $100 checks from them, but if you use them and like them, leave a comment and maybe I'll get a few.
Asset Builder
No affiliate agreement here. This is Scott Burn's (the couch potato portfolio guy) company. The unique thing about this roboadvisors is the DFA funds.
- Minimum investment: $50,000
- Fees: 0.45% of AUM on first $200K, gradually decreasing after that. Plus commissions of $20-50 per trade.
- Portfolio: DFA funds
- Extra features: Live advisor
Asset builder has been around longer than most of these other companies and is more of a hybrid live/robo advisor model. Thus the price is good for a live advisor, but a little high for a roboadvisor. The big benefit here is the DFA funds, but I think it's lame you have to pay commissions on each trade in addition to the ER of these traditional mutual funds. I'm not sure I understand exactly why that is. But if your main goal for hiring these guys is to get access to DFA, your long-term costs are likely to be lower with flat-fee blog advertiser FPL Capital Management. If you've got a million bucks, Rick Ferri's AUM fees are lower than Asset Builder's too. Bottom line: A little steep but a reasonable option for someone who really wants DFA at a much lower price (and a much lower asset minimum) than most, but not all, live advisors.
Folio
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No affiliate agreement. Folio is not so much a roboadvisor like Betterment and Wealthfront but more like a really cheap brokerage that allows you to buy your entire portfolio for one low price.
- Minimum investment: None.
- Fees: $4-10 commission per trade plus typical brokerage fees, plus a $15 a quarter fee if you don't make at least 3 trades.
- Portfolio: 150 preset portfolios to choose from or design your own. Presets are often iShares or Vanguard ETFs.
- Extra features: $290 a year gets you 24,000 free trades if you're into day trading
The unique thing here is the “Folios,” similar to the “Motifs” above. A Folio is up to 100 individual securities that you can buy and sell all at once. So if you build your own portfolio of 5-10 ETFs, you can just buy them all with one commission, instead of paying 5-10 commissions. Folio's direct competitor is Motif, but I'm not sure I can see a good reason to go with one over the other. If you decide you want to pick your own stocks and put them in a Folio/Motif, you can put 100 in a Folio, but only 30 in a Motif. Both of these services are more like a tool for a DIY investor rather than an actual roboadvisor. It's probably easier to just buy a target retirement fund at Vanguard than to use either of these.
Jemstep
No affiliate agreement. Jemstep is really marketed to advisors, rather than clients. It is more of an online platform that can be used to complement a live advisor than a roboadvisor all on its own. The real benefit is in aggregating all of your financial accounts together and fusing it with your own advisor's unique model portfolios and style.
Hedgeable
No affiliate agreement. Hedgeable is a little different from the other firms in that it uses a much more actively managed strategy. Not only do they use stocks and ETFs, but they also use private equity, bitcoin, real estate, and commodities.
- Minimum investment: None.
- Fees: 0.75% per year rapidly scaling down to 0.30% per year for everything over $1M
- Portfolio: Stocks, ETFs (Powershares, iShares, Vanguard, Currencyshares, SPDR), private equity, bitcoin, real estate, and commodities- 200 different “customized portfolios”
- Extra features: $290 a year gets you 24,000 free trades if you're into day trading
This roboadvisor uses the Folio brokerage as its custodian, which makes sense given its model. It has basically made 200 folios and added a fee on top of it for their services. The best way to describe what it does is “active management.” It's a bit of a black box really, and in fact, they can take your account all the way to cash if they want. They don't use leverage, shorting, or derivatives, however. You must be an accredited investor to do the private equity, and you can opt out of the private equity and bitcoin investments, but apparently not the real estate or commodities. I can't really recommend these guys. Not only are the fees pretty high for a roboadvisor, but I really prefer to have much more control over any alternative investments than Hedgeable offers. I just don't buy the “sophistication” argument. If you have used Hedgeable, tell your story in the comments section.
Acorns
No affiliate agreement. Acorns is a little bit gimmicky, but their real claim to fame is they use your spare change to invest.
- Minimum investment: $5
- Fees: Free for students and those under 24. 0.25% of AUM a year with a $12 minimum.
- Portfolio: 4 Vanguard ETFs, 1 iShares ETF, and one PIMCO Fund in various allocations
- Extra features: Round-up feature on purchases
The gimmicky thing on this one is “rounding up” your purchases in order to make a bunch of tiny investments. This one is squarely aimed at Joe BlueCollar. Basically, if you buy lunch for $5.59, 41 cents gets invested at Acorns. You're “picking up little acorns to store for the winter” if you will. This is all run through an app on your phone. But you can also do one time lump sum investments or recurring investments, so if you like the portfolios, don't dismiss Acorns just because of the gimmicky round-up feature. Also, don't think you're getting some extra bonus from your credit card rewards using Acorns. The money that is rounded up comes out of your checking account, it doesn't go on your credit card.
Vanguard
The author and his son backpacking in the Uintas
No affiliate agreement (dangit, but I'll be the first in line if they ever start one.) The smart folks over at Vanguard saw all these roboadvisors taking off and figured they could easily compete in this space with their focus on low costs. However, what they offer is a live advisory service for the price of a roboadvisor.
- Minimum investment: $50,000
- Fees: 0.3% per year
- Portfolio: Vanguard funds
- Extra features: Financial planning advice included, all advice given by CFPs, personal advisor for $500K and up, tax loss harvesting
Vanguard isn't going anywhere, and its heart is always in the right place thanks to its compensation models. There is a massive bias toward Vanguard investments (a moderate bias is certainly appropriate anyway) and there is always the question is just how good the advice is, especially on financial planning topics. But to have access to a live CFP for little more than Wealthfront or Betterment? It's tough to make a strong case against that. Certainly Vanguard is going to take a ton of business from overpriced, self-interested live advisors, and probably a fair amount from the roboadvisors too. If a good advisor wants to fight off this proposition, he's got to keep fees reasonable and have plenty of real value-adds, such as student loan management, asset protection, or tax management expertise.
Charles Schwab
No affiliate agreement. Schwab decided to one-up Vanguard, by offering a similar service for an even lower price- free. However, it's not quite the same service. Schwab's is called “Intelligent Portfolios,” which are a collection of ETFs from Schwab and anyone who will pay Schwab to put their ETFs in the collection (i.e. no Vanguard ETFs)
- Minimum investment: $5,000
- Fees: Free
- Portfolio: ETFs from Schwab and others (14 Schwab, 40 from others), average ER in the 0.23% range
- Extra features: Tax loss harvesting
I love that Schwab does this for free. I don't like that they don't use Vanguard ETFs like everyone else. The basic Schwab ETFs are probably fine, but their fundamentally weighted ones and other ETFs are definitely less attractive to me. You also don't get a CFP on the phone to help with some of the financial planning issues. Still, like Vanguard, Schwab isn't going anywhere and you may already have your money there.
Wrapping It Up
So there you have it, a brief overview of what's out there in the roboadvisor space right now. If you have ruled out doing it yourself, and don't want to pay for a full-service advisor, then this is a great little opportunity to get some help for a very low price. Among the more traditional roboadvisors, I like Betterment best, mostly due to their very low fees and sweet interface. Among the aggregator/brokerage services that assist DIYers, I see little difference between Motifs and Folio. Among the hybrid robo/live models, I prefer the Vanguard option. And if you want something completely free, both WiseBanyan and Schwab have nice offerings. All of the portfolios offered by all of these companies fall into the “reasonable” range (with the possible exception of Hedgeable, but even that is hard to know) and are far better than what you're probably doing now if you're considering hiring a roboadvisor.
What do you think? Have you used a roboadvisor? Would you? Why or why not? Which one do you think is the best? Comment below!
I’m a huge fan of betterment and have been using them for a year and a half. I do some investing in my own with schwab but enjoy betterment for my passive investing.
I thought about switching over to schwab intelligent portfolios when they came out however they keep some of your “invested” money as cash which lowers your return and leads to cash drag. I think that’s an important thing to realize.
What is your take on whether to take into account your 403b or 457 when using tax loss harvesting in your brokerage account? I have heard the IRS cannot enforce any rule against if you sell a index fund in brokerage but buy a similar fund in pre-tax 403/457 within 30 days as a wash sale violation since this is not explicitly stated in IRS publication, however IRA’s are. Am I understanding this correct that wash sale rule basically only applies to buying a similar fund within 30 days in a taxable to taxable or taxable to IRA?
I hadn’t heard the rule was different in 403(b) than in an IRA. I generally just try to avoid the issue by using different funds. There are so many similar funds out there it doesn’t seem that hard. Does add complexity though.
Awesome post. I’ve been very tempted to give Betterment my taxable account for the last three years for the primary purposes of tax loss harvesting. I have no doubt that they could get me at least 0.5% in TLH to make up for the 0.15% fee with their software. Why haven’t I. Three reasons 1) It will be a pain to change around my 401/PSP, wife’s 401k & 457b, and our Roths to purge Vangaurd MF/ETF and iShares that would trigger a wash sale. 2) I dabble in a bit of TLH myslef, so actual benefit may just be about half of what they advertise. 3) I find it hard to completely trust software with my money. What if there is a glitch? Maybe just minor but cancels out TLH for a year or worse.
That said, I’ll probably go with Betterment in the next few years if they remain strong. Interested to hear how those that have used them have faired.
I’m a little skeptical about the claimed benefit of TLHing these guys are claiming. Unless you somehow remove the low basis shares from your account by dying or donating them to charity or by going into a low CG bracket and then tax gain harvesting, you’re really only deferring the tax. That has value, but not as much as it appears when you first take the loss.
One additional roboadvisor is Financial Engines. It is included with Vanguard accounts and does a good job of connecting to any and all accounts that have internet access, regards of the company (fidelity, etc…)
I played with Acorns for a little while, but it became tiresome when my credit card information repeatedly was dropped and had to be re-entered. It was more of an investing toy or game than a strategy.
Last year, I decided to do an automatic investing plan with either Wealthfront or Betterment in the taxable environment. I liked the investment strategy at Betterment better than Wealthfront for two reasons:
1. I preferred the small/value tilt of Betterment.
2. I preferred to not have an allocation to real estate in this portfolio, and VNQ is part of the Wealthfront allocation.
There are quite a few Wealthfront vs. Betterment articles on the web, and they are worth reading if you are deciding between the two. I am not thrilled with the allocation to non-muni bond ETFs, and this might ultimately limit my engagement with Betterment.
Since I “grew up” investing in a much higher fee environment, the nominal charge for rebalancing and tax-loss harvesting does not faze me. There are countless significant behavioral missteps that can derail an investment plan that dwarf these charges.
Today’s WSJ includes an essay on Robos. A quote on Schwab’s : “But Schwab got people talking when it disclosed that its Intelligent Portfolios have 4% to 30% cash as part of their asset allocation. Schwab makes money for itself by investing at least some of the cash overnight.”
I read the Schwab defensively published a 16 page white paper on the value of cash as an investment. For that reason alone, Schwab’s robo should be mentioned only to be condemned.
I agree that the cash component in a Schwab account is a backdoor way of charging for the service. Their service is “free” in a sense that they don’t charge you, but there’s an opportunity cost to having the funds in their money market account. I agree with them that there’s a value in having cash as part of a portfolio, but ideally you could hold you cash at one of the FDIC-insured online banks that pay 1% (or so).
There are several of these guys that robo-invest like 90% of your money and have a mandatory cash segment, which is of course where they make their money. I dont want someone making things mandatory…that just so happens to boost their bottom line.
Seems a little sneaky, doesn’t it. That’s one reason I generally default to Vanguard unless there is a very good reason not to use them.
I have long considers trying betterment for the tax loss harvesting as well. I know I should tax loss harvest, I have a few thousand in international that I can do that with today. I haven’t thus far because I am concerned about dividends and don’t want to be caught in the 30 days before and after I make the sale/purchase. My other concern is turning my simple 4 fund portfolio into 5-8 funds because for international I would need ftse and extended market, and for US I would need to add S&P and small cap. Another problem I have is that Vanguard forces you to reinvest dividends in their individual 401K. I only have total U.S. And total bond in there. Either way I need to be careful when I tax loss harvest making the process more cumbersome. I gues I am too lazy to deal with the increased complexity.
I wonder if I am over thinking this. Maybe some of you can chime in and help.
Why not swap to a very similar, but not exactly similar fund? Then you’re not out of the market.
I think you misunderstood my hesitation. If I want to tax loss harvest Total International, to be comparable I would need the FTSE and extended market. I will be going from 1 fund to 3 funds which increases complexity. What is even more frustrating is that Vanguard forces you to re-invest dividends in their individual 401K. Therefor they are automatically purchasing funds for me with every dividend distribution. It would force me to time the tax loss harvest to be >30 days from the last purchase and >30 days from the next dividend distribution.
Unless I am missing something. Am I? I really should tax loss harvest this year as I have a Long term capital gain that I prefer not to have to pay 23.8% taxes on some of it.
Why the 30 day window? If you’re not a shareholder on the ex-dividend date/date of record you wont get a dividend. You literally only need to have a security/fund for a single day to collect the dividend.
International extended market? Not sure what you mean. If I were going to tax loss harvest TISM, I’d go to the FTSE fund. Then if I had to do it again in a short time period, I’d go into Developed markets. Then maybe into Fidelity Total international. Then Schwab total international. Then maybe (I’d have to check fees) the tax managed international. By then hopefully 30-60 days has passed and I can go back to the original one.
OK.
I just filled my order requests. Tax loss harvest close to $8,500
I was lucky enough to have a $28K long term capital gains from my 5% play money fund. That will cut my taxes by 23.8% or save me $2K
Thanks for the push I needed to just get er done.
Alex,
Did you trade this within a 401(k) account?
Carp
I chose Wealthfront over Betterment.
1)Wealthfront’s website is an artistic beauty. I’m an art snob, and can’t suffer Betterment’s beast.
2) I inquired about selective liquidation and transfers of appreciated securities. Wealthfront staff assured they can facilitate that , but have not had occasion to test it.
I sent $110k to Wealthfront 8 weeks ago and already have $40000 in tax losses harvested, primarily in commodities and emerging markets
$40000, correct that to $4000
I use Personal Capitals software and app. It is a good aggregator. Prior to leaving a brokerage to go to Vanguard I called PC to see what they would charge it was 0.75 on 5.2 mill. Needless to say I went to Vanguard. If you have a big enough account you can talk with a CFP when you need to or do a plan. It is not hard to tax loss harvest via specific lots. I will consider using their advisory services when I feel Alzheimer’s creeping in but for now it is easy to manage at Vanguard and not incur any additional fees. PC is an easy way to check your net worth, see how much in fees you are paying, and how much retirement income per month your portfolio will produce. I occasionally get a call from them soliciting my business but I just cheerfully decline and continue to use the beautiful charts and graphs.
I have to agree with using the personal capital free app to have a global view of all your accounts. I think bottom-line for investing/asset allocation this app is much better than Mint. Mint seems to be more for people that need to keep a formal budget…. i.e. grocery bill budget is $100, entertainment $50, etc…
I had multiple checking/savings accounts to manage (including my wife’s accts) and the app really lets you take a global view on your positions (Cash/investments/debt). For me, I realized I had way too much allocation to cash after using this app and have been correcting this issue since.
I think the value proposition of something like Betterment needs to include slicing and dicing. If all the advice they give you is a one-time stock/bond allocation, that is not worth paying an AUM fee for the long term. You can get that above for free in many places online. It would be worth the AUM fee if you believe they will outperform a simple three-fund portfolio by more than the AUM fee due to the small/value/emerging tilts. Personally I am fine coming up with my own allocation and managing it myself, but wouldn’t want to manage 10-15 different funds.
Thanks WCI for that very thorough review of options available. With so many options, and potentially different allocation strategies, I was reminded of a useful post by Meb Faber looking at different allocation strategies going back to 1970
http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/
Conclusion: minimal difference in returns between the strategies.
So I tend to see the utility of roboadvisors as protecting you from your own behaviors. if it makes it easier to invest and stay in the market and avoid tinkering with your portfolio all at a relatively low cost, that is probably the biggest benefit from using a roboadvisors. The differences in investing strategies may not play such a large role and perhaps is more marketing than anything else. The differences in cost is what you should really pay attention to.
Anything that helps you stay the course is extremely valuable, whether it be a book, a website, a forum, a roboadvisor, or a full service advisor. You can lose far more than typical advisory fees through bad behavior.
How much are you willing to pay for advice the day you reach critical mass
Even .3% of 5-10 million is quite a bundle
Good overview.
In the annual cost analysis I did to compare the three most popular services (Betterment, Wealthfront, and Charles Schwab) Charles Schwab came out the cheapest in total fees (which included ETF fees). Though that 6-30% cash drag would cost you a lot of possible returns lost over a 10 year period.
http://investorjunkie.com/42668/true-costs-robo-advisors/
I suspect one day they will be forced to change their business model, but until then there are cheaper options.
I would really classify Motif as a robo-advisor, though they do offer a “robo-advisor” like service. Even the broker TradeKing with their TradeKing Advisors service is getting into this service.
Lastly, robo advisor services are filling a specific need. Individuals who typically don’t have enough net worth to hire a financial advisor, or IMHO replacing costly traditional advisors with a robo-advisor where in some cases will give better asset allocation guidance.. at a cheaper annual fee to boot!
One of the issue I have is that I would have to transfer 401k and other accounts to Betterment. But that way I would lose benefit of back door Roth. Not sure if their TLH strategy would offset that benefit.
Does vanguard low cost advisors help with TLH? Would they advise on whole portfolio ( have taxable account and IRA with vanguard but 401k and HSA with other institution) or just account we would have with Vanguard?
Vanguard’s service does not offer TLH but does optimize ETFs between taxable and tax-deferred accounts with them.
That’s a good question. I’m sure they’d do general questions, but I wouldn’t expect management of the 401(k) like you’d get from a full service advisor.
Last week I spoke to a Vanguard adviser from the ? voyager ? adviser class.
Vanguard creates different classes of advisers depending upon one’s total invested in Vanguard mutuals/ETFs. One class gives you access to a group of advisers ; another to an individual. He revealed that one can receive general advise on your total assets while only paying fees on as little as $50,000. Also, with assets of > 5 mil. the fees drop to .20% ( standard is 0.30%). My understanding was that this pays for investment advise , but not financial management.
Interesting point. So perhaps all you need is a $50K IRA there, which at 0.3% is only $150 a year for advice. Pretty darn cheap. I would definitely read TFB’s series about it prior to hiring Vanguard. Here’s the conclusion:
http://thefinancebuff.com/vanguard-financial-plan-review-worth-it.html
Nice article. What you did not mention however are the ETF fees on top of the roboadvisor fees. For example for Betterment the total fees are going to be 0.15% to 0.35% plus the 0.1% (expense ratio) etf fees. ETFs also have a bid/ask spread along with price difference between trading price and NAV price. What I really like about the vanguard passive allocation funds is that they range about .15%-0.19% total.
I didn’t bring that up because you’re pretty much paying that wherever you go since most of these services are using Vanguard and iShares ETFs. At this point, those ERs are so low you can almost ignore them. Yes, you’ve got commissions and bid/ask spreads, but it’s still pretty low and it’s pretty much the same with any of these guys.
While Vanguard’s ETFs are slightly cheaper their cost for the robo-advisor part of the service is more costly than the other robo-advisors. So the net effect is close to a wash in total annual fees when compared to the other services. I haven’t added Vanguard to my list of total cost yet (in the URL above), but will be adding it in the near future to have a 4-way comparison and get their true cost.
Gotta share this clever analogy to investing bad behavior from the famous investment philosopher Mike Tyson:
“Everyone has a plan ’till they get punched in the mouth.”
–Mike Tyson
It just goes to show that nothing is “free” in this world, especially in the world of investing. But it is smart to do due-diligence and review low-cost options such as these. I am always leery of these robo-advisors and their online platforms in the event of a hack, or merger, etc. I have used Vanguard since my residency and am very pleased with their online/email advice and options. I’m a big fan of index funds for the more-efficient asset classes (US Large Cap, Mid Cap). I am more than find paying .3-.4% per year for them to manage my money for me and to have a well-diversified portfolio. The Morgan fund has averaged over 10% since the 1950’s.
I have looking into Motif investing- even though the majority of the Motif’s seem like child-play gambling. It’s interesting- but I would use that as a “fun” account. And I love how they advertise there “Best Performers” first- versus the dogs that are getting hammered, which are way back on page 15. Those are the ones you should be putting money into- not the ones up 38% YTD.
I just came across Motif and I am glad to see it is legit and has a place in the world of finance. Like ^^^Drew^^^ above mentioned, they seem to be the perfect vehicle for your “fun” money. … and yes, I am tempted to put a little money in their top performer, but also into their dogs along with picking a few of my own ETF.
The question as a noob is this: You showed a min of 50K for Vanguard. I thought Vanguard had a minimum investment of $3000 which would then automatically convert to something called an Admiral Fund when you hit $10K ??
This is for Vanguard’s advisory service, NOT just investing in their no-load mutual funds.
this is wonderful and compherensive post about roboadvisors.
Some questions arise in mind, i will repost here
Human Financial advisors have fiduciary duty(legally defined). how much of it they follow is another story.
–but what is fiduciary duty of roboadvisor?
–are this robots allowed to manage assets of non-accredited low net worth investors?
–what exam series/quality/calibration testing these roboadvisors have to pass?
–who is legally responsible if roboadvisor runs amok or software get hacked?
there are actual investment and IT humans behind the curtain.
I read literally. every. single. page of Wealthfront’s website, and perused Burt Malkiel’s book before I sent $$ there.
good questions. likely none are yet tested.
Don’t know. Read the fine print.
Yes.
Interesting question. I think the correct answer is it depends.
The company.
Maybe I’m just a novice, but just wanted to make sure I fully understand this. Is there any advantage at all of TLH in a 401K or IRA account? My assumption is no, and this is only for taxable accounts. Thanks in advance.
in a 401k,IRA ?
NO. None. Nada.
Correct.
So the only reason I can see for me to move to one of these is for the tax loss harvesting which I do not know how to do (and likely don’t have patience to do). How much does tax loss harvesting really save me? I know you’d need specifics, so as a high-end comparison, how much on average does it save you (WCI) a year, if you don’t mind me asking?
Tax loss harvesting is not hard to do. Most places where you might have your investments will allow you see the gain or loss of individual lots (either stock or bond funds). If the lot is at a loss you can sell it and use the loss against any current capital gain you might have or up to $3000 dollars of ordinary income. Also you can carry forward the losses meaning you subtract the $3000 from your income each year until you have a capital gain. As others have mentioned the goal is to sell the loser and buy something similar but not identical so as not to mess up your asset allocation. I did this in 2008 and di not pay any capital gains until 2014. I stayed invested but took advantage of the loss.
Tax loss harvesting only works in taxable accounts. I swapped funds and took a $300000 loss. The swapped into fund of course took off in 2009 and I had the loss to protect against capital gain taxes for 7 years. So if you have significant money in a taxable account then you can save lots of money.
It doesn’t save me squat. Almost all my investments are in 401(k)s and Roth IRAs. There’s no significant taxable account to tax loss harvest. At most, you can save about $1K a year ($3000 deduction, ~33% tax rate) plus whatever gains you can offset.
To follow-up on my previous question, I did call Vanguard. They will only manage account I have with them, not whole portfolio. They can help with TLH, but would be tough if they are not managing whole portfolio, and do not know our positions in other accounts.
Has anybody worked with Financial Guard? They seem like better fit. It seems like they manage your whole portfolio including all account types, do not need to transfer accounts, and has fixed yearly fees of $150
So much for that idea with Vanguard.
Never heard of Financial Guard. I worry that price might be too low for quality advice. Seems too good to be true. I’d love to hear more though.
Very nice summary. I was considering signing up for a Betterment account for a Roth, but after doing some research I decided just to stay with Vanguard. The fees are a lot lower and I think betterment specifically suffers from over diversification. A guy in his 30’s doesn’t need to be in so many different ETF’s in my opinion.
A few months ago we posted a page on our website which details some of the drawbacks and issues that exist with some of the various ‘Robo’ advisors. Many platforms which we reviewed had specific limitations in the way they managed the portfolios.
This is the link: http://www.fplcapital.com/institutional-platform/robo-advisors/
Overall, most of these automated programs are good for smaller accounts.
However, when the account is larger, you can gain much more from an advisor or money manager who is not placing your portfolio in the ‘Cookie Cutter’.
Furthermore when the account is larger, your fee could be significantly lower than a Robo adviosr. For example, a client who pays an annual fee of $2,000 on their $2 million dollar portfolio, is only paying 10 bps.
Excellent points.