You have an amount you want to invest. Where should you put it?
The growing answer is to use a robot advisor, which uses algorithms to invest for you based on your age, goals, and risk tolerance. About 3.5 million American adults will use robot advisors this year, according to eMarketer, the project will increase to five million by 2025.
That has been fueled by strong interest from millennials, who, according to Vanguard, are twice as likely to have a baby boom think about using a robo-advisor. However, with an estimated $460 billion in assets under management (AUM), robot advisors comprise only a fraction of the $29.1 trillion AUM of the US wealth management industry, according to Aite Group.
However, robot advisors can be a good choice for new investors, busy people who don’t want to do it themselves, or people who don’t have a lot of capital to invest but want to diversify and reduce their costs. And they’re offering more customization services to those who have more — for a slightly higher fee.
The industry is best known for its fintech (financial technology) startups, such as Betterment, Wealthfront, and Personal Capital. But the old guard dominates the field: Vanguard Personal Counseling is the biggest by far, with an estimated $231 billion AUM, which is almost four times that of another respectable name, Schwab Intelligent Portfolio. Betterment, Wealthfront and Personal Capital each have $20 billion to $25 billion in AUM, creating a crowded field among fintech startups.
In a nutshell this is what they offer.
Vanguard, the world’s second largest asset manager (after BlackRock) with $7.5 trillion in AUM, offers Vanguard Digital Advisor an initial investment of $3,000.
As a Vanguard customer, I signed up and the algorithm automatically linked to my holdings and asked me about my earnings and long-term plans. It then ran through six scenarios to gauge my risk tolerance before recommending an allocation to Vanguard’s general portfolio of four domestic and international stock and bond ETFs.
The cost is 0.20% annually, or $6 a year for a minimum investment of $3,000. Vanguard says it relies on the same four funds it uses for the funds on target dates and refunds the fund fees, bringing the net cost to about 0.15%. That’s the same expense ratio 0.15% as the Vanguard 2055 Target Retirement Fund
but with some customization.
Once you hit $50,000 in assets, you can “graduation” into Vanguard Personal Advisors, which add staff and help you plan more broadly, for a fee of 0.3 % of assets at $50,000 ($150 when you have the minimum) down to 0.05% if you have $25 million in assets invested at Vanguard (that’s a minimum fee of $12,500 a year) ). With this service, you will be charged a fee of the money you own.
Schwab Intelligent Portfolio works on a similar principle, with a slightly higher minimum investment of $5,000. So you won’t have to pay fees for an algorithm-generated ETF portfolio by Charles Schwab
based on your responses to its brief questionnaire (although you will pay the fees for the ETFs yourself). Schwab automatically rebalances your portfolio to match your target allocation.
For a minimum investment of $25,000, Schwab Intelligent Portfolio Premium includes guidance from a Certified Financial Planner (CFP) for an initial planning fee of $300 and $30 per month. the following month. You’ll need to have $120,000 in assets to match the 0.3% Vanguard Personal Advisor annual fee.
Schwab was charged a $200 million fee for potential legal costs related to the Securities and Exchange Commission’s investigation into its disclosures about Smart Portfolio. Critics have accused Schwab’s portfolio has a much higher cash allocation than its competitors.
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Three other options
The other three top robot advisors have slightly different strategies. Wealthfront and Betterment are aimed at beginner as well as seasoned investors. Personal Capital serves a broader range of older clients with substantial assets to invest.
You can get started at Wealthfront for as little as $500; Investment account management fee is 0.25% annually. Wealthfront builds a portfolio of six to eight low-cost ETFs, but it allows you to substitute your own options or build the whole thing from scratch. It offers crypto and socially responsible investment options as well as handles 529 college savings plans and non-employment accounts, which it manages to be tax-efficient.
Betterment has no minimum investment and it also charges 0.25% of your assets annually. So you get a diversified portfolio of low-cost ETFs, auto-balanced reinvestment and dividends, and a personalized dashboard to check your progress toward retirement and other goals. For a minimum investment of $100,000 and an annual fee of 0.4% (minimum $400), you’ll have full access to certified financial planners.
Personal Capital, owned by Empower Retirement, offers personal and automated financial planning for an annual fee of 0.89%, but its $100,000 minimum investment (so the fee is minimal. is $890 a year) making it out of reach for most beginner investors.
In summary, robot advisors are a good choice for investors who are just starting out or don’t need complicated advice. They allow you to move towards more personalized planning by real people as you accumulate more. And the fees are quite reasonable, especially compared to all-inclusive financial planners, who often charge 1% or more of assets. You won’t get everything those planners have to offer, but what you get is usually good enough.
Howard Gold is a columnist for MarketWatch and Retirement Weekly.
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