Robo advisory firms have exploded in popularity due to a strong stock market, technological innovation, the difficulty of active managers in beating the S&P 500, and low fees.
The question many people who manage their own money or use a more expensive traditional wealth advisor now have is whether investing with a robo-advisor is safe?
We must trust the institutions we do business with, especially if it relates to our hard-earned savings. The last thing you want is a Bernie Madoff situation where a billionaire ended up bilking his clients out of over $50 billion in assets! Since there’s no FDIC insurance protection for investment accounts, it’s imperative to do a thorough analysis.
I spend a tremendous amount of time researching before I make any sort of investment. Given I live in San Francisco, I’m able to have face-to-face access with many financial technology company management teams and their employees as well.
I also worked in the financial services industry for 13 years at Goldman Sachs and Credit Suisse, and I got my MBA from UC Berkeley in 2006. I’m a financial veteran who takes pride in being tremendously thorough.
Here’s my criteria before I sink a single dollar in a new investment platform:
* Spend over 100 hours researching each product, which includes signing up and testing everything out first.
* Meet with at least two senior management members.
* Write an in-depth review of the product that’s at least 1,200 words long.
* Get feedback from the community of 1 million+ Financial Samurai readers for further research.
* Make sure each firm has been around for at least 5 years.
* Make sure each firm has enough funding or is in good operational health to last as long as possible.
* Make sure each firm has a contingency plan / back up fiduciary in case something goes wrong so all clients can get their money back.
* Only focus on the top 1% best firms.
Now let’s first explore what a robo advisor is.
What Is A Robo-Advisor?
A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners.
Robo-advisors use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in the more personal aspects of wealth management, such as taxes and retirement or estate planning.
Robo-advisors are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online. The biggest difference is the distribution channel: previously, investors would have to go through a human financial advisor to get the kind of portfolio management services robo-advisors now offer, and those services would be bundled with additional services.
By deploying sophisticated algorithms based on Modern Portfolio Theory, robo-advisors are able to provide customized investment portfolios for each individual based on the responses they provide in a short questionnaire upon signup.
The idea is that excessive fees at traditional wealth advisors rob investors of their retirement money or cause people to have to work longer – robo advisors are designed to help investors avoid excessive fees.
Based on my research, two robo-advisors stand out above all else. They are Personal Capital and Betterment. I’ve met with many employees of both firms since 2011, and I’m regularly provided with updates. Here are the company details for each firm.
Personal Capital Overview
Total Equity Funding: $265.3M in 7 Rounds from 12 Investors as of 2021.
Headquarters: Redwood City, California with offices in Denver and San Francisco.
Description: Personal Capital is the leading digital wealth management firm.
Founders: Bill Harris, Louie Gasparini, Rob Foregger.
Categories: Financial Services, Wealth Management, Finance, FinTech.
Sign up link: Personal Capital
Founded: July 1, 2009
Contact: firstname.lastname@example.org | (855) 855-8005
Employees: ~500 as of 2021
Personal Capital is an online investment advisory platform that provides its clients with electronically facilitated wealth management services, objective advice, and strategies. Personal Capital’s fees are based on a client’s percentage of assets managed by the platform, and include wealth management, trade costs, and custody.
Personal Capital summarizes its users’ bank accounts, credit cards, mortgages, and other financial details together in one place. The platform also highlights its users’ long-term fiscal health over month-to-month spending with tools such as a visual graph of their investment allocation and a 401(k)-fee analyzer.
Personal Capital is a hybrid robo-advisor which uses both human advisors and sophisticated algorithms to help people manage their money. See my full Personal Capital review here.
Personal Capital Management
Added Mike Arnsby as CTO in 2016. Mike helped take Yodlee public in 2015.
Personal Capital Funding History
Personal Capital Latest News
I had lunch with the Director of Marketing in the beginning of 2019 to get an update. Here is some key information.
* Surge in assets under management. Assets under management have surpassed $10 billion in 2019, from just $2 billion at the start of 2016. In other words, their asset gathering has accelerated for those who utilize Personal Capital to manage their money. Personal Capital also tracks over $200 billion in assets (not managed) as more and more people leverage their free software to track their finances.
* Key personnel hires. Personal Capital hired Mike Armbsy, ex CFO of Yodlee to be their new CFO. Mike was responsible for helping Yodlee go IPO in 2014. In addition to Mike, Personal Capital welcomed Paul Desmarais of Power Financial Corporation to their Board of Directors. Paul is intimately familiar with Personal Capital as he helped lead Power Financial’s $75 million investment in their Series E financing last year.
These two key hires portend to a potential IPO down the road. These hires contrast to other fintech companies who are losing key personnel to competitors. Total headcount has increased to 400 as of August 2019, a 25% increase from the same time last year. It’s risen to ~500 as of 2021.
* Lower minimum. For those who want to use Personal Capital to manage their money, you used to need at least $100,000 in investable assets to become a client. Personal Capital has now lowered the minimum asset hurdle to $25,000. This is great news for the millions of people out there who need low cost digital financial advice with the guidance of a human advisor.
It’s clear to me that Personal Capital is in strong financial health, and here to stay. They’ve got a great suite of free financial tools everybody can use to keep track of their net worth, management their cash flow, x-ray their portfolios for excessive fees, and plan for their retirement.
Betterment Company Update
Total Equity Funding: $275 million in 7 rounds from 15 investors as of 2021.
Headquarters: New York, City.
Description: Betterment is one of the largest and fastest growing digital wealth advisors (robo-advisor), with over $24 billion in assets under management.
Founder: John Stein
Categories: Fintech, Financial Services, Wealth Management.
Founded: Launched in 2011
Betterment is one of the only roboadvisor who offers both investment management and financial planning. Clients receive a personalized, globally-diversified investment portfolio that is managed for them when they open an account.
Betterment provides data-driven, actionable recommendations to improve net-of-fee, after-tax, risk-adjusted returns. With an annual advisory fee of 0.25%, users can monitor their real-time investment performance, review recent transactions, receive financial advice, and manage their deposits.
View my comprehensive Betterment review here.
Robo Advisors Are As Safe As Any Other Wealth Manager
Robo advisors are regulated by FINRA (Financial Industry Regulatory Authority), which regulates all financial institutions in America. As a result, robo advisors need to follow the same stringent compliance rules as everybody else.
In a way, robo advisors may be under more scrutiny since they have savvy venture capitalists as investors pouring through their financials every month to make sure everything is above board and going well.
There are obviously no guarantees that any company will ever be around forever. Just look at companies like Pan Am and Circuit City who are no longer with us after dominating their fields.
But I’m confident that firms like Personal Capital and Betterment will continue to grow their assets under management and be around for years to come. They may either go IPO or get acquired by a larger financial institution like robo advisor FutureAdvisor did by Blackrock in 2015 for ~$150 million.
Each robo advisor has a custodian bank that acts as the safeguard for your money in case the robo advisor were to go out of business. The custodian bank will be responsible for transferring your investments to a new bank or liquidating your assets in an orderly fashion and returning your money.
For example, the custodian bank for Personal Capital is Pershing Advisor Solutions, a Bank of New York Mellon Company with over a trillion dollars in global client assets.
Robo advisors offer a low cost way to automatically invest in the stock and bond market. Given the S&P 500 has historically returned ~7% a year and the aggregate bond market has returned historically ~4% a year, it’s a good idea to invest regularly for the long term. Inflation is too powerful of a force to combat.
Gone are the days of being too intimidated to start because you don’t have $250,000 minimum, don’t want to pay up to 3% a year in fees, and don’t know what to invest in. With a firm like Personal Capital or Betterment, all you’ve got to do is sign up for free and they’ll invest for you in a risk-adjusted manner.
Just remember to never confuse brains with a bull market. There will be ups and downs in the cycle. But if you invest throughout the downtimes, I believe there’s a great chance that you’ll end up with a very health retirement nut. At the very least, sign up for Personal Capital’s free financial tools to give yourself an investment checkup.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income partially thanks to his new investments in real estate crowdfunding. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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