Test Driving Robo-Advisors: Their Recommended Portfolios And ETFs

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Includes: LQD, MUB, VIG, VOE, VTI, VWO, XLE
by: J. David Stein

Summary

How robo-advisors' recommendations differ even if you answer their questionnaires a similar way.

How much do robo-advisors charge to manage your money.

Robo-advisor will tell you how to invest, but not how much you can earn investing.

Click to enlarge

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.

The Test Drive

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.

Click here to download a summary sheet of their recommendations.

Betterment

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 managed by Vanguard and iShares. Sample holdings include Vanguard Total Stock Market ETF (NYSEARCA:VTI), Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD).

Betterment differed from the other three robo-advisors in that they were the only one to recommend U.S. mid-cap stocks using the Vanguard Mid-Cap Value ETF (NYSEARCA:VOE). Betterment recommended I keep most of my fixed income allocation in municipal bonds via the iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB).

Betterment will manage a $100,000 portfolio for 0.15% of assets, not counting the expense ratios on the underlying ETFs.

FutureAdvisor

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

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 via the iShares National AMT-Free Muni Bond ETF.

Wealthfront was the only robo-advisor to recommend dividend investing using the Vanguard Dividend Appreciate ETF (NYSEARCA:VIG) and energy sector investing via the Energy Select Sector SPDR ETF (NYSEARCA:XLE).

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.

Podcast

For a more in-depth discussion of robo-advisors including their recommendations and their approach to tax-loss harvesting listen to Episode 92 of the Money For the Rest of Us show.

(Click the play button above to hear the podcast)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The Information and opinions contained in this article are for educational purposes only. The Information does not consider the economic status or risk profile of any specific person. The Information and opinions expressed should not be construed as investment/trading advice and does not constitute an offer, or an invitation to make an offer, to buy and sell securities. Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that an investment will achieve any particular rate of return over any particular time-period or those investors will not incur losses.