They are definitely more modern than the classic 1966 Western starring Clint Eastwood.
The first Robo Advisor appeared 42 years after this Eastwood blockbuster. We’ve stolen the title from that Hollywood classic and created our own Hollywood movie (article) featuring Robo-Advisors 11 years later.
Grab your popcorn and your 48oz soda cup, and turn off your cellphones – today we embark on a journey every investor should undertake.
Table of Contents
The Good, The Bad and The Ugly: Robo-Advisor’s Edition
What is a Robo-Advisor?
How to Get Started with Robo-Advisors
Alternatives To Robo-Advisors
Final Thoughts
The Good, The Bad and The Ugly: Robo-Advisor’s Edition
Have you ever wondered why robo-investing has become so popular? What is the catch (there’s always a catch …)?
You’re at the right place.
Let’s start with the introduction of our star, robo-advisors. Then, let’s dive into this three-part article for 2019.
Part 1: The Good — The Pros of Robot Advisors
Part 2: The bad – Things Robo Advisors Could Improve
Part 3: What’s Ugly about Robo-Advisors?
Robo Advisors are becoming more and more popular. You’re familiar with the situation, right? Everyone wants to jump in because it’s so popular and gaining traction.
Betterment was one of the first. Schwab followed soon after. Since then, many players have entered the market, including Wealthfront, M1 Finance and Wealthsimple. Ellevest, Blooom Personal Capital, SoFi, Blooom, Wealthsimple.
This post will review Betterment and Blooom.
Why?
Betterment is the first and, if not the best. Blooom is a 401(k), only, focused advisor. We’ll look at the good, bad and ugly of both robo-advisors.
What is a Robo-Advisor?
In 2008, Robo-advisors appeared on the scene like Tom Cruise does in his movies when he runs away from an explosion.
Bikes away?
In 2008, during a global economic recession, the world’s first roboadvisor was born. Since then, they’ve only grown in popularity.
Online platforms, such as Robo-Advisors, do 99 percent of the work when it comes time to invest. Before opening an account, most will ask that you answer a number of questions.
The robo-advisor then automatically selects investment vehicles for your based on the answers you provide.
Robo-advisors use an algorithm to buy and manage investments on your behalf, optimizing your portfolio and reallocating it according to your goals.
Recent popularity of these systems is due to their low cost, ease of use, and efficiency.
Robo-Advisors – The Good
Robo-advisors can be a great tool. Overall, most of the robo-advisor’s benefits revolve around one aspect:
Simplicity.
Robo-advisors can make your life much easier. Just as credit cards made it easier to buy goods and exchange cash, robo advisors simplified investing. They didn’t cut corners either.
The benefits that they provide are often things that financial advisers can’t (or charge a lot of money to do).
Easy Setup
A robo-advisor is easy to use. To open an account, you must first answer a series of questions.
The questions are generally pretty simple. The questions are usually centered around:
Personal Details: such as your email address and date of birth so they can open an account on your behalf.
Investing Details : Tell them your goals and when you plan to retire so they can customize your account to meet your needs.
You will most likely answer these questions. The robot-advisor will do the rest. It’s a lot easier (and takes less time) to use a robo-advisor than doing it yourself.
Ongoing Management
Robo-advisors manage your assets on a continuous basis. That’s why you signed up with them!
After your portfolio has been set up, they will manage it based on your questions.
Your portfolio will change as you age, and as your personal financial goals and investing goals change.
They usually provide a simple online platform that allows you to monitor your progress.
Tax Optimization
Tax optimization is the most complex service offered by most roboadvisors. Tax optimization can come in many forms. Most commonly, this involves ensuring that your assets are placed in the correct accounts and tax losses are harvested.
Smartly investing assets in different accounts will save you tax money over time. Robo-advisors will often place tax-advantaged assets in taxable accounts and vice-versa. Say you own an asset (like a municipal bonds) that isn’t taxed. They’ll make sure that the asset isn’t sitting in a Roth IRA, wasting its tax benefits.
Tax Loss Harvesting – Tax loss harvesting is a way to save money when your investments lose value. If you invest in an index fund which drops 10% over a year, your robo-advisor instantly sells that fund and purchases a similar fund. You can write off your losses and still remain invested in similar assets.
Customer Service
Although the name of their company includes “robo”, this does not mean that they lack human contact or customer service.
It is reassuring to know that most robo-advisors still offer real human support. Some even provide professional advice when needed (though it is usually at an additional cost).
Fund Selection
The fund selection in robo-advisors is usually very good.
It’s very good. This means it has a lot low-cost ETFs or index funds, which I would invest in anyway.
Betterment, for example, is filled with funds from Vanguard, Charles Schwab and other leading companies that offer low-cost ETFs and index funds. Both funds have expense ratios below 0.05%, which equates to $5 per $10,000 invested in annual fees!
The Bad of Robo-Advisors
There are no roses or butterflies in the Wild West. And it’s certainly not that way here. We’re about to enter the heart of the plot!
Simplicity is often accompanied by a lack in customization and detail. In the case of roboadvisors the results are no different.
Lack of Customization
Signing up for a robot advisor is essentially giving up your right to build and customize your portfolio. They have a wide range of funds.
They don’t offer the same range of options as you would if you invested on your own.
Robo-advisors also use simple strategies. These simple strategies may be great for 90% of investors (or more), but they make it difficult to invest in real estate and other sectors.
You are stuck with their plan, for better or worse.
Advice not given
Betterment, and other Robo Advisors offer certified financial planners for an extra fee. However, their planning is limited. Most Robo-Advisors don’t offer a relationship that can last over time.
Soon I will offer my suggestions on where to go for advice.
Lack Of Detail
Robo-advisors are also lacking in detail. The short survey that you fill out when opening an account may seem simple and easy, but it comes with a price.
How much information can a robot-advisor gather about you by asking a few simple questions?
How can they make an informed investment decision with so little information?
Yes, I think they can. There is a danger in not providing the details that you request.
The ugly side of Robo-Advisors
The final scene.
Our guns are out of ammunition. Here is the end of the wild west adventure.
There is one thing that is unpalatable about robo-advisors: their price.
Cost
Look, robo advisors are an absolute bargain compared to the majority of financial advisors or actively managed mutual funds. The “ugly’ call-out is in this case relative to the other items that were considered.
Cost is the biggest problem with robo-advisors. However, it’s not always a deal breaker.
Most robo advisors charge around 0.25%. The fee will vary by company but this is a good average.
They charge $25 for every $10,000 managed by the robo-advisor. This is how firms earn money and keep their servers (lights?) on. on.
As I said, this fund is an absolute bargain compared to actively managed funds that charge 1% or higher.
This is a cost you can easily add to if you invest on your own.
If you invest wisely on your own (through Schwab or Vanguard or another reputable broker online), you will pay fees of about 0.10%. If you’re lucky. Many funds charge 0.03% or less.
This is less than half of the management fees charged by a roboadvisor. The worst part is that the roboadvisor also charges you for fund fees.
In our example, if your funds have an average fee of 0.10%, then the robo-advisor would charge you 0.35% (0.25 management fee + 0.10 funds fees).
You have to make a decision – do the benefits of robo-advisors (the good) outweigh their costs (“the bad”, “the ugly”)?
How to Get Started with Robo-Advisors
I believe that robo-advisors are often worth their cost. Particularly for those who are new to investing or want to be hands-off.
It is very easy to get started with roboadvisors. Below are two of our favorites robo-advisors, each of which is good for a particular part of your portfolio.
Betterment
Betterment was the first robo advisor to launch in 2010. Their mission statement is “Help People live better.” It sounds a bit corporate.
They certainly deliver on that promise by offering the best in class investing resources to the mass market.
Betterment operates like a typical robo-advisor. Betterment asks new investors a series of short questions in order to manage and set up their investment.
Investors can take a hands-off approach. This is a great approach for new investors.
This may be a good option for people who don’t have the time to worry about reallocating their investments. Betterment optimizes your portfolio to minimize taxes.
Betterment works with a variety of individual accounts, including personal brokerage accounts and Roth IRAs.
Here is a complete review of Betterment.
Blooom
Blooom is a roboadvisor for 401(k), IRAs, and other retirement accounts.
The idea was developed by two Wall Street men a few year ago. Do not be scared off by that.
The founders of the company were tired of Wall Street, and what it was currently offering to everyday investors.
Here’s what they have to say (the video lasts 3 minutes and is worth watching):
Blooom is a new company that offers two main services:
Get a Free 401(k).
Ongoing 401(k Management
Get a Free 401(k).
Blooom connects to your 401 (k) account to provide you with actionable tips to optimize your 401 (k).
Price: Free.
No hidden fees. No hidden fees.
Account Minimum: $0
Services: 401(k), which provides:
Diversification is recommended.
Check your fee fund to see if it is the lowest possible.
Other red flags include investing in company stock.
Retirement tracking snapshot to ensure you’re investing enough in your 401 (k).
Ongoing 401(k Management
Blooom offers ongoing 401(k), so you can let them handle the details. This service is similar in nature to that of Betterment or other traditional roboadvisors.
Price: $10 per month.
No hidden fees. No hidden fees.
Account Minimum: $0
Services: 401(k) management, including:
Free analysis is available at the link above.
Automatically invests you in the best funds based on risk profile and your goals.
You should rebalance your 401(k), to ensure that you are on the right track towards retirement.
Here you can sign up for Blooom’s 401k Analyzer.
Alternatives To Robo-Advisors
This story has focused solely on robo-advisors, but other investment options deserve to be included in the feature.
Do it Yourself Investing
The most affordable investment method is almost always managing your investments. This is also the most time consuming. Not everyone is motivated, knowledgeable, or has the time to do it.
Complete guide to index investment for beginners is a post I wrote that might help readers get started with their own investing.
The Money Mix has provided the following information on how to hire a financial adviser.
Hiring A Financial Advisor
It can be costly to hire a financial adviser, but that doesn’t mean it has to be. Finding a good financial advisor can be a difficult task.
How can you tell if someone looks good?
You might find that a financial advisor is cheaper than a robot-advisor if you choose the right one. Index funds have lowered mutual fund fees, and forced funds to make adjustments.
Robo-advisors form part of this competition. The competition has forced firms to adjust their pricing in order to remain competitive.
Financial planning fees
Previously, advisors were paid commissions on transactions. The competition forced them to switch to an asset-based payment.
They charge you a percentage of the assets that they manage on your behalf. The average quoted price is usually 1%. If you have $250,000 invested in your account, the annual fee of an advisor managing it is $2,500.
Asset-based fees are being reduced and in some cases eliminated by the competition from firms that charge flat fees. Most progressive firms provide both planning and money management for a flat fee or via subscription.
Planners charge a flat fee, such as $1,000, to create a comprehensive financial planning. Some charge the same flat fee to everyone, no matter their size or complexity. Some, such as Facet Wealth have moved from a fee-based model to one that is subscription only.
Facet can manage your money for as little as $40/month. Facet doesn’t charge fees based on assets. They have some of the lowest fees in the industry.
Facet Wealth, like Robo-Advisors makes financial planning accessible to anyone in need of help but who doesn’t wish to pay too much for it.
Facet has all of its advisors certified as financial planners, CFP(r). The CFP(r), or Certified Financial Planner, is the gold standard for financial planning advice.
It’s still better to control your finances yourself. We do realize that it is not for everyone.
Final Thoughts
This is the conclusion of our epic 2019 sequel to the Western classic!
We hope to have made up for the lack of dramatic sunsets and shootouts with some useful information. Now you are ready to explore the Wild West of robo-advisors.
You can now get excellent financial advice for anyone who needs it.
This original post originally appeared on Wealth of Geeks. It is being republished by permission.
