Robo advisors now hold more than $60 billion of investor assets. This pace of growth is a promising sign that the number will continue to increase in the years to come.
The two critical questions are; 1). What are the pros and cons to robo advisors, and 2). Which one robo advisor do we choose?
Here’s my review pitting two of the largest robo advisors against each other for your entertainment and educational enjoyment: Wealthfront vs. Betterment.
Why Robo Advisors
What is the value proposition from robo advisors? Why are more people switching?
Robo advisors offer automated services without the use of a team of analysts and traders.
By eliminating pieces of the operating puzzle, robo advisors have a cost advantage in many investing services.
One positive trend is people are moving away from high cost investment vehicles such as hedge funds and mutual funds. Often these fees can be as high as 2% or 3%, sometimes even higher.
People pay the high fee because they expect to beat the S&P 500.
As Warren Buffett highlighted last year, the performance from these hedge funds isn’t shaping up.
Given that you’re reading this now, you know how the personal finance blogosphere feels about fees.
What About those Fees?
Here’s the blunt of it:
Betterment’s .15% annual fee results in 2.65% of my retirement portfolio at age 67.
Wealthfront’s .25% annual fee turns into 4.48% of my retirement portfolio at age 67.
In an effort to further accentuate the stat:
Robo Advisor fees may exceed six figures.
Even with a 2 million dollar retirement, fees could result in $100,000.
A small fee is still likely to cost many tens of thousands of dollars.
Thanks to companies like Vanguard offering online services where we can buy and sell shares with incurring a management fee, investing has become remarkably easy. (If you’re looking to get started, check out my first two steps.)
Investing is not as difficult as robo-advisors and others will have you believe.
But…. But Tax Loss-Harvesting is amazing, right?
At the peak, tax-loss harvesting will benefit you by $X in a single year. If we received the maximum benefit every single year then our total robo advisor benefit would be $750.
Compare this with the total fees taken from your portfolio: again X%.
When the cost outweighs the benefit, I’m not sure why the assets under management (AUM) is at $60 billion and growing.
For the best write up I’ve seen disassembling the “tax loss harvesting is amazing” discussion, check out this post.
Other Pro’s to Robo Advisors
Another pro that robo-advisors offer, is removing the emotions out of our investing strategy. Think about it; if we decide the stock market is too low and we want to sell, we still retain the option to do that via a robo-advisor, albeit it may take an extra few steps.
The access to funds is not 100% eliminated, so we are still exposed to the standard emotional turmoil each investor will face.
Another benefit is rebalancing. Vanguard (and others) offer the same ability to rebalance via one click of a button. If eliminating one button press is a strong enough benefit to remove 10% of your portfolio, then by all means, sign yourself up and send me some of that spare cash while you’re at it!
Do not use either service. Investing is easy enough where we don’t need to pay someone else 5% of our retirement portfolio.
The same topic of robo-advisors was discussed on the podcast a few weeks back:
What is your take on robo-advisors?
P.S. The comments section was not up on the site for a bit but it is back now so share your opinion if you care.
P.P.S. For more numbers and charts, check out this fantastic post on a real case scenario.