This post will show you how to pick a robo-advisor in the digital wealth management era. Long gone are the days of paying 1% – 3% for a traditional wealth manager to manage your money. Today, you can use free wealth management tools online to manage you money yourself!
Thanks to the internet and innovation, fees are going down. A robo-advisor has made wealth management more accessible to the masses.
How To Pick A Robo-Advisor
One of the reasons why I’m an Apple user is because I appreciate good service. When I dropped my Macbook one evening and my hard drive stopped working, it was incredibly easy to schedule an appointment with the Genius Bar at my local Apple store. They fixed my hard drive and recovered my data within 30 minutes and away I went.
Peace of mind is worth the premium, which is why I’m a fan of the hybrid robo-advisor Personal Capital. Personal Capital not only has the best free financial tools online to track your finances, it also has a sophisticated digital wealthy advisory business with human financial advisors to provide financial guidance.
Robo-advisors, aka algorithmic advisors deploy sophisticated investment algorithms to help invest your money in the best risk-adjusted way possible. You essentially fill out a profile about yourself and the algorithm will go to work to recommend and implement their recommendations for you.
But because Personal Capital also has financial advisors, you also have someone to talk to about your portfolio. In fact, you can sign up fo free and get a free consultation worth $799 today.
Leverage Technology To Your Advantage
I used to have a hard time trusting computers to do anything for me. But after spending 13 years covering some of the largest mutual funds and hedge funds in America, it’s clear that algorithmic investing, or more commonly known as quantitative investing or scientific investing have done well.
For example, Bridgewater Associates run by Ray Dalio is the largest hedge fund in the world with over $120 billion dollars. It’s a macro quantitative fund with tremendous performance. Famous hedge funds run by George Soros, David Tepper, and Steve A. Cohen can’t even compare.
A good quant fund or algorithmic advisor is all about having good people. At the end of the day, the investment variables are created by people and continuously tested for maximum returns. Spending time understanding people’s backgrounds and then trusting them to do the right thing is a huge part of letting other people run your money.
After all, the reason why you want someone else investing your money is because your expertise lies elsewhere. You’ve got more interesting things to do with your time. Just make sure you understand all the fees you’re paying. Here’s a look at the average advisor fees by brokerage to give you an idea.
In this article, I’d like to provide a brief primer on the benefits of using a robo-advisor to manage your money. There are a plethora of rob-advisors that exist today. But my main focus is on Personal Capital, a hybrid rob-advisor that uses both humans and technology to help you manage your money.
Target-Date Fund Investing
The core offering by robo-advisors is very similar to investing in a target-date fund. A target-date fund works by taking your desired retirement age (without taking into account risk appetite), and slowly shifting your stock/bond split more heavily to bonds as you approach your retirement date.
Personal Capital needs investors to transfer over their assets in order to create those target-date fund accounts, and they can only see the assets they hold. Once you give them your assets, they allocate them to create a balanced portfolio, but only within that account. That’s a valuable service, but for investors with multiple accounts already, it may not be the right solution.
Personal Capital charges up to 0.89% on your assets. Personal Capital manages about $20 billion of client’s money and generally targets the more sophisticated investor. The more assets you have with Personal Capital, the lower the fees.
Vanguard’s target-date funds charge 0.17%. The expense ratio for Wells Fargo’s index-based target-date funds ranges from an average of 0.35% to 1.63% per year. For the two classes of Fidelity’s actively managed Freedom funds, the average annual expense ratios are 0.57% and 0.60%.
Target date funds are very popular for 529 college savings plans.
A Top Down View Of Your Overall Finances
In order to get a balanced recommendation for your investment portfolio, it’s important for the robo-advisor to see what your overall financial picture looks like. For example, let’s say you own a lot of real estate like I do (~35% of my net worth).
If you believe in modern portfolio theory, then it’s important to take into account the other parts of your net worth when filling out Pesonal Capital’s simple questionnaire in the beginning.
Here’s a sample portfolio that Personal Capital will create for me after inputting my answers. I’m a relatively high risk tolerant investor who is happy to buy more stocks if there is a 10% price correction.
Deeper Tax-Loss Harvesting
Both digital wealth advisors do tax-loss harvesting, but they do it in different ways. Personal Capital conducts tax-loss harvesting on the assets you’ve given them from the moment you create an account. They handle future losses.
Accounts at any other brokerage can be moved to Fidelity or TDAmeritrade without a tax hit. It’s called a “transfer in kind.” It means you don’t have to sell what you have and buy something else. This approach logically seems better since it looks at your overall wealth.
Free 401(k) Management Advice
Since none of the robo-advisors can actively manage money in a 401k, the majority just ignore it. Personal Capital, on the other hand, looks at your entire portfolio holistically.
They manage around your 401k with the assets you choose to give them. They also show you how to cut fees and rebalance within your portfolio (without charging on the assets in the 401k). It’s the extra step that makes sure you have a fully diversified portfolio – not just a single diversified account.
Given that 401(k)s account for most of Americans’ retirement savings, Personal Capital’s ability to work with them makes it much more valuable.
Below is Personal Capitals free Investment Checkup tool that analyzed my 401(k) It showed that I was paying $1,748.34 in fees a year I had no idea I was paying!
More About Algorithms For Investing
The algorithms Personal Capital have are built on data going back over a 100 years where available. Their back testing has been done in some of the most extreme financial corrections. They have held up well so far.
Personal Capital’s algorithms seek out commission-free ETFs within your broker to eliminate trading costs. iShares are funds that trade commission-free. Fidelity has 100s of commission free ETFs, as two examples. Since they aren’t trading underlying equities, trading costs are rarely if ever an issue.
Personal Capital has a team of seasoned CFAs and PhDs who create and maintain the algorithms. Personal Capital also has as an academic council who help inform us of financial developments. Check out my Personal Capital review in more detail.
Robo-Advisors Are The Future
Personal Capital is an excellent choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves. It is the premier rob-advisor today. In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while being invested in the market.
Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation. You don’t need to fund your account to see what type of portfolio they’ll construct for you. Sign up and see what Personal Capital has to offer.
About the Author: Sam began investing his own money ever since he opened an online brokerage account online 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 Goldman Sachs and Credit Suisse Group. 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. He is very focused on building more passive income through real estate crowdfunding to arbitrage lower valuations in the heartland of America.
So they can’t advise on my fidelity 401k. But if I open a fidelity account for 10k they will manage that money (10k) and give me free guidance on my fidelity 401k?
So this makes sense IF you weren’t starting from scratch.
But what if you’re starting from scratch?
I’m going to retire (well, quit working at one job, anyway) with $400K in a 401K. That 401K has extremely limited choices and I plan to move it all out and plop it into one of these types of robo-advisers.
Given that, it seems like FA’s “watching outside accounts” doesn’t do me any good; and given the amount involved, it seems like Betterment‘s 0.15 fee beats the heck out of FA’s 0.5 fee.
So the real question for a neophyte like me (there’s a reason I want to use these services) is which service is going to have the best paradigm behind it (they’re all going to trade slightly differently based on the humans programming the computers in the first place) and does that fee difference make enough difference to give Betterment the edge?
Greetings. If you had 10K to invest today and adding $15 k per month with a 10 year time frame, relatively aggressive to save for a house – what approach would you employ. Assuming emergency fund, retirement in order and no debt.
Reviewed betterment, jemstep, fortune advisor and also considered target date vanguard and vanguard life strategy. Leaning towards Fortune advisor – is there anyway to compare returns historically over last 3, 5 and 10 years?
Enjoy your site, actively track market but results, results, results is the bottom line on how I make the final call.
I’m fairly new to your blog, but have really been enjoying it since a friend recommended it, and I am currently reading it in chronological order (started on page 141, up to page 113).
I recently invested some money with Betterment, as I am quite intrigued by the algorithmic robo-approach to optimal investing. In the course of my research, I came across an article/analysis of theirs on emergency funds, which argued that instead of the traditional $X in a savings account, $1.3X invested in a betterment account with a 40% S&P500/60% 5yr T-bills ratio is a far better choice over a 5 year period. Their analysis then plots returns on this theoretical portfolio for every 5 year period starting 1955, compared to $X in the bank.
I can certainly see that my current safety fund making 0.90 APY in an AmEx “High Yield” savings account is slowing losing ground to inflation over time, but on the flip side, that is a small price to pay for the cushion to not cut into any other investments (possibly at the worst possible time) in a crisis.
What are your thoughts on investing a safety fund, or any type of cash that you’d like to remain liquid, in this manner?
This seems like a good use of technology. Why not use what computers do very well. Using an algorithm to help you better manage your investments sounds good if you know what to do with the information. The more information the better.
Interesting article. However, I don’t really get the point of using a robo-advisor. If the goal is to essentially create a target-date fund why not just get a vanguard target date fund and save on the costs of the middle man? FA actually sounds decent since it takes into consideration your 401k. Majority of Americans don’t invest/save more than $17500 a year so Betterment and Wealthfront seem to be completely pointless to most. FA is also nice since it would eliminate the need for them to con clients into investing outside their 401k, if the get paid advising that too.
It must do a great job at finding cheap funds to get 12 assets classes on 360k portfolio to 0.15% ER. I would assume all index? But in your case does it really make sense to switch from a 0.22% to a 0.15% + 0.5%? I’m pretty sure you knew that your portfolio wasn’t diversified and didn’t need a robo-investor to tell you that.
I also think their claim that to have beat the S&P 500 interesting. Must have more young investors than old with a low % of bonds. Be interesting how long they can make that claim for.
I guess if your really want to take no part in your investments/savings than FA is probably one of the better options out there.
By the way what’s your USTA rating?
Justin Katz (@justin_katz) says
Are you done with Personal Capital? They do something similar, no?
Financial Samurai says
I’m still consulting for PC. FutureAdvisor is a algorithmic only advisor with no human advisors. Personal Capital is often incorrectly grouped in the Robo-advisor category as they employee a team of human financial advisors in SF and Denver. PC’s minimum is $100,000. FA’s minimum is $10,000. A slightly different demographic, although PC’s app is free for all to use.
An intense amount of work obviously went into this article. I commend you for that.
I must admit that even though I am still a proponent for Vanguard funds for those that prefer an off-hands approach, I am still impressed by the affordability of these new-ish online advisors. You’re paying more than if you did the research yourself, but you’re also getting better tools for analysis I suppose.
Jason @ Islands of Investing says
I don’t use a robo-advisor, but admittedly I had no idea there was something this sophisticated out there – FutureAdvisor looks amazing from what you’ve shown above! Getting a cold, hard opinion on your risk exposure would be pretty valuable – I know I often mistakenly assume my portfolio is ‘safe’ just because I’m confident about each individual investment.
Shame they don’t cater for Australian residents – I’d definitely be keen to give it a trial.
Joe I says
That’s pretty neat FutureAdvisor goes to the client instead of having to port all your assets to them. But how do they actually make the trades and rebalance for you if all your assets are still with you? Do you give them a right to trade on your behalf?
I like their free grade report and optimization / recommendation analysis.
Joe from FutureAdvisor says
Hi Joe – We take limited trading control of your accounts which lets us make the trades and balances on your behalf. Since we custodian with TD and Fidelity, it makes for a pretty simple process if you’re already using them!
What is the process if you don’t have an account with TD and Fidelity? Is it all done online where you would gain access to my E*TRADE account, for example? How long does the process take?
Joe from FutureAdvisor says
We’d have to have you open an account with Fidelity (which is part of our internal process) but then we’d transfer the assets in-kind from e-trade (no need for liquidation, and the account is in your name not ours). All the paperwork can be signed electronically, and the transfer to the Fidelity account would take 5-7 business days.
Let me know if that makes sense!
Jay @ ThinkingWealthy says
Great article. Admittedly, it’s definitely something I wish I knew more about. I still have a hard time handing off my investment decisions to someone else (even a financial adviser/planner) but the day is coming when I’ll have to I assume. Optimizing for taxes is also something I haven’t really been worried about but as the value of my portfolio grows, I really should start.