How to Invest: Robo-advisers give you decent financial advice on the cheap
You’ve got some money you want to invest. Where should you put it?
Increasingly the answer is to use robo-advisers, which use algorithms to invest for you based on your age, goals and risk tolerance. Some 3.5 million adult Americans will use a robo-adviser this year, according to eMarketer, which projects that will increase to five million in 2025.
That has been driven by strong interest from millennials, who, according to Vanguard, are twice as likely as young baby boomers to think about using a robo-adviser. Yet with an estimated $460 billion in assets under management (AUM), robo-advisers comprise only a tiny sliver of the $29.1 trillion AUM of the U.S. wealth management industry, according to Aite Group.
Still, robo-advisers can be good choices for new investors, busy people who don’t want to do it themselves or those who don’t have much to invest but want to be diversified and keep their costs down. And they are offering more customized services for people who have more—at a slightly higher fee.
The industry is best known for its fintech (financial technology) start-ups, like Betterment, Wealthfront and Personal Capital. But the old guard dominates the field: Vanguard Personal Advisory Services is the biggest by far, with an estimated $231 billion AUM, nearly four times as much as another venerable name, Schwab Intelligent Portfolios. Betterment, Wealthfront and Personal Capital each have $20 billion to $25 billion in AUM, making for a crowded field among the fintech startups.
Here in brief is what they offer.
Vanguard, the world’s second-largest asset manager (after BlackRock) with $7.5 trillion in AUM, offers Vanguard Digital Advisor, which requires an initial investment of $3,000.
As a Vanguard customer, I signed up and the algorithm automatically linked to my holdings and asked me about my income and long-term plans. Then it ran through six scenarios to evaluate my risk tolerance before recommending an allocation to a generic portfolio of four Vanguard domestic and international stock and bond ETFs.
The cost is 0.20% annually, equal to $6 a year for the minimum investment of $3,000. Vanguard says it relies on the same four funds that it uses for its target-date funds and rebates the fund fees, bringing the net cost to around 0.15%. That’s the same 0.15% expense ratio as the Vanguard Target Retirement 2055 Fund
but with some customization.
Once you reach $50,000 in assets, you can “graduate” to Vanguard Personal Advisor Service, which adds a human to the mix and helps you with a broader range of planning, at a fee of 0.3% of assets at $50,000 ($150 when you have the minimum amount) down to 0.05% if you have $25 million in assets invested at Vanguard (that’s a minimum fee of $12,500 a year). With this service, you’ll have to pay the fees of the funds you own.
Schwab Intelligent Portfolios works by the same principle, with a slightly higher minimum investment of $5,000. For that, you’ll pay no fee for an algorithm-generated portfolio of ETFs chosen by Charles Schwab
based on your answers to its brief questionnaire (although you will pay the fees of the ETFs themselves). Schwab automatically rebalances your portfolio to conform to your target allocation.
For a minimum investment of $25,000, Schwab Intelligent Portfolios Premium includes guidance from a Certified Financial Planner (CFP) for an initial planning fee of $300 and $30 a month after that. You’ll need to have $120,000 in assets for that to match the 0.3% annual fee Vanguard Personal Advisor charges.
Schwab has taken a $200 million charge for potential legal costs in connection with a Securities and Exchange Commission investigation of its disclosures about Intelligent Portfolios. Critics have alleged Schwab’s portfolios have a cash allocation much higher than its competitors’.
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Three more options
The other three leading robo-advisers have somewhat different strategies. Wealthfront and Betterment are aimed at beginning as well as seasoned investors. Personal Capital serves more established clients with substantial assets to invest.
You can get started at Wealthfront with as little as $500; management fees for investment accounts are 0.25% annually. Wealthfront builds portfolios that include six to eight low-cost ETFs, but it allows you to substitute your own choices or build the whole thing from scratch. It offers crypto and socially responsible investing options as well and handles 529 college savings plans and nonretirement accounts, which it manages for tax efficiency.
Betterment has no minimum investment and it, too, charges 0.25% of your assets annually. For that you get a low-cost diversified ETF portfolio, automatic rebalancing and dividend reinvestment, and a personalized dashboard to check your progress toward retirement and other goals. For a minimum investment of $100,000 and an annual fee of 0.4% (a minimum of $400) you’ll get full access to certified financial planners.
Personal Capital, which is owned by Empower Retirement, offers automated and personal financial planning for an annual fee of 0.89%, but its $100,000 minimum investment (so a fee of at least $890 a year) makes it beyond the reach of most beginning investors.
In short, robo-advisers are a good option for investors who are just starting out or don’t need complex advice. They allow you to advance to more personalized planning by real humans when you accumulate more. And the fees are pretty reasonable, especially compared with full-service financial planners, who often charge 1% of assets and more. You won’t get everything those planners offer, but what you do get will often be good enough.
Howard Gold is a columnist for MarketWatch and Retirement Weekly.