Robo-Investing is the Next Big Thing

Toy Robot

Image by Randy Chiu

It’s no big secret the financial services industry often takes advantage of retail investors.  High fees, poor performance and a lack of liquidity can be the cost of doing business with a commission-based financial advisor.  They have to get paid and that requires some costly products.

Finally, there is an alternative to hiring a financial planner or choosing your own investments.  For a small fee, you can try robo-investing, also known as automated investment advisory.  It is suddenly all the rage with millions of retail investors, especially Millenials, who seem to trust technology more than people.

Since programming an algorithm is cheaper than hiring lots of financial advisors, there can be significant savings for automated investors.  There can also be a big advantage to automating the entire investment process.  You can set it and forget it, instead of manually rebalancing your portfolio.  There are also automated features for very complex transactions, such as Differentiated Asset Location and Tax-Loss Harvesting.

Disclosure: This is not a paid post. I received no compensation from nor do I have any financial interest in companies profiled in the article. This information is provided objectively for the interest and entertainment of my readers.

The Key Players

Wealthfront – Wealthfront was established in 2011 and has over $2.6 billion under management.  They have quite an array of automated services including Direct Indexing, Differentiated Asset Location and Single Stock Diversification.  Customer assets are held in a brokerage account by Apex Clearing Corporation.  The management fees are .25%, with the first $10,000 managed for free.  The account minimum is $500, which is great for small investors.

Betterment – Betterment was founded in 2010 and has over $1.7 billion under management.  One nice feature of Betterment is individual goal setting.  This is something I did manually for my retirement funds, my house fund and college funds for my kids.  Management fees range from .15-.35%, in three tiers, depending on assets in the account.  There is no account minimum, but you will pay the highest tier fee (.35%) until you have at least $10,000 invested.

Schwab – Charles Schwab has been a champion of small investors for decades.  As one of the early discount brokers, they offered an alternative to pricey brokers on Wall Street, long before you could buy stocks online.  Their Intelligent Portfolios are available to investors with an account minimum of $5,000 and are free of commissions and advisory fees.  Managements fees are generated from the Schwab ETFs and third-party ETFs available in the portfolio.

FutureAdvisor – FutureAdvisor was founded in 2012 and has over $600 million under management.  They don’t hold your assets directly, instead you invest with Fidelity or TD Ameritrade and they manage your accounts.  For some odd reason, people over 68 years old aren’t eligible to invest with FutureAdvisor.  There is no account minimum for the free service, but the premium service requires at least $10,000.  The management fee is a flat .5% of assets.

My Predictions for Robo-Investing

  • Automated investing will continue to grow at a rapid pace.
  • Traditional investment firms will add automated features (like Schwab), in order to attract investors to their funds and ETFs.
  • Automated investing will begin to displace low-end investment advisors.
  • Younger investors will prefer automated investing to managed investing, the same way automatic transmissions have replaced manual gear boxes.

The Bottom Line

The bottom line is that good financial planning requires a lot more than picking a couple of investments and hoping they meet your goals.  If you lack the time and experience to do your own planning, robo-investing may be the solution.

“An investment in knowledge pays the best interest.”

– Benjamin Franklin

Recommended Reading

Barron’s – When Financial Advisors meet their Robo-Rivals
The Simple Dollar – Betterment vs. Wealthfront
Dough Roller – Betterment vs. Wealthfront

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