How do the leading roboadvisors compare in terms of their recommended portfolio mixes, fees, expected returns and risk.
In this episode you’ll learn:
- What is a robo-advisor.
- What are the hallmarks of a disruptive technology.
- What portfolio mix do robo-advisors recommend.
- What fees do robo-advisors charge.
- What is tax loss harvesting.
Innovator’s Dilemma by Clayton Christiansen
The Tax Harvesting Mirage by Michael Edesess
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A new breed of investment advisor has been gaining traction over the past four years. They are online investment platforms, also known as robo-advisors, that use computer algorithms to recommend and manage diversified portfolios of exchange traded funds (“ETFs”) for individuals.
Collectively, the four leading robo-advisors, Betterment, FutureAdvisor, Schwab Intelligent Portfolios, and Wealthfront, manage over $10 billion in assets for 120,000 clients.
The vast majority of these clients are under age fifty as robo-advisors primarily target tech-savvy individuals in their twenties and thirties that have typically been overlooked by traditional financial planners due to their small account balances.
Robo-advisors boast simple to use web interfaces making it easy to set up and fund an account.
I recently test drove the four leading robo-advisors to see what portfolio allocation they recommended to a retired 50-year old male with a moderate risk appetite.
The recommended asset mixes varied significantly as did the level of information the robo-advisors required in order to get a recommendation.
The one thing that was consistent across all four robo-advisors is none of them told me how much I could expect to earn investing with them.
Here is an overview of my experience with the four leading robo-advisors.
Betterment determined a recommended allocation for me by asking only three questions: my age, was I retired and my annual income.
According to Betterment, my taxable portfolio should be 56% in stocks and 44% in bonds. Their recommended allocation included 11 ETFs, all managed by Vanguard.
Betterment differed from the other three robo-advisors in that they were the only one to recommend U.S. mid-cap stocks. Betterment recommended I keep most of my fixed income allocation in municipal bonds.
Betterment will manage a $100,000 portfolio for 0.15% of assets, not counting the expense ratios on the underlying ETFs.
FutureAdvisor was the only advisor that required access to my existing investment portfolio in order to provide recommendations. Consequently, I linked my brokerage account to the FutureAdvisor site.
The advisor asked for my age, income, marital status, when I wanted to retire and whether my risk tolerance was conservative, moderate or aggressive.
FutureAdvisor recommended I keep my portfolio 37% in stocks, 6% in real estate investment trusts, 55% in bonds and 2% in cash. They didn’t provide specific ETF holdings. They were the only advisor not to recommend municipal bonds.
FutureAdvisor compared their recommended allocation to my existing portfolio and determined how many of their nine recommendations I was following.
Based on their analysis they determined my current portfolio was too risky for my age. The problem with this conclusion is FutureAdvisor only considered my liquid investments held in my brokerage account. They didn’t ask about the private investments that I hold outside of my brokerage account that brings my overall risk level down.
FutureAdvisor recommended an allocation to 12 different asset categories. They will manage a $100,000 portfolio for 0.5% of assets, not counting the expense ratios on the underlying ETFs.
Wealthfront began their process by asking me what I was looking for in a financial advisor. I answered by selecting from a list of four items, such as whether I wanted a diversified portfolio, did I want to match or beat the market, did I want to save money on taxes and would I like to have someone manage my money for me.
Not surprisingly, whenever I checked a box, a pop-up showed how Wealthfront could accomplish that objective for me.
Wealthfront then asked my age, income, whether I was retired, had dependents and whether I came from a single or duel income family. They also asked how much I had in cash and liquid assets.
In terms of risk tolerance questions, Wealthfront asked whether I wanted to maximize gains, minimize losses or both equally. They then asked how I would react if my investment portfolio lost 10% in month.
Based on my answers, Wealthfront decided I had a risk tolerance of 7 on a scale of 0.5 to 10 with 0.5 being the most risk averse.
Wealthfront’s recommended allocation was the most aggressive at 82% stocks and 18% bonds for a taxable account. Even at a conservative risk level of 2, Wealthfront recommended 52% in stocks and 48% in bonds.
Wealthfront’s portfolio was simplest with only six ETFs recommended for a taxable account. They recommended the entire fixed income allocation be invested in municipal bonds.
Wealthfront will manage a $100,000 portfolio for 0.225% of assets, not counting the expense ratios on the underlying ETFs. They don’t charge a fee on the first $10,000 of invested assets.
Schwab Intelligent Portfolios
Schwab Intelligent Portfolios, which is a subsidiary of Charles Schwab, had the most comprehensive questionnaire. They asked about my account goals, my knowledge of stocks, bonds and ETFs, and three separate risk tolerance questions.
Schwab then asked me if I would be comfortable if my investment portfolio fluctuated between a certain dollar amount and gave me the opportunity to adjust that the portfolio outcome range using a slider.
The recommended allocation was 32% stocks, 5% real estate investment trusts, 47.25% bonds, 2% gold and precious metals and 13.75% cash.
Schwab didn’t provide specific ETF recommendations, but their portfolio was the most diversified with 18 different holdings.
Unlike the other robo-advisors, Schwab doesn’t charge an account level management fee since they use their own underlying ETFs as part of the Intelligent Portfolios service.
398: When Should You Hire An Investment Advisor? Two Case Studies