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Robo-Advisors

Summary

What are robo-advisors?

Why are they attractive to investors?

Analysis of four robo-advisor offerings.

            The first robo-advisor was launched by Betterment in 2008 with the original purpose to rebalance assets for investors to manage passive investments through an online interface. Prior to 2008, only wealth managers had access to sophisticated portfolio allocation software. The beginning of robo-advisors finally allowed the investor to directly access the technology. Over the past eleven years, the use of robo-advisors have gained great popularity and many financial institutions have begun to advertise their own unique robo-advisor offering. It is estimated that half of investors aged 53 to 64 and one third of retirees use digital resources to manage their finances. AT Kearney projects that assets under management by robo-advisors will grow by 68% annually to approximately $2.2 trillion in the next five years. While robo-advisors assume the same legal status as human advisors, by registering with the SEC as Registered Investment Advisors, the FDIC does not insure the assets under management by digital resources. There are numerous attractive qualities associated with various robo-advisor services, allowing them to be more accessible to investors with fewer assets. Typical financial planners charge a fee of about a 1-2% of the client’s total account balance, while robo-advisors generally charge only .2-.5%. They also require much less capital than traditional financial advisors who usually require $100,000 in assets. Most robo-advisors offer a website login or app for investors to conveniently monitor their portfolios and have access to customer service representatives and financial planners. Each robo-advisor provides different services under varying fees and stipulations, therefore each individual and unique investor must assess their goals while searching for the best robo-advisor for themselves.

Wealthfront

            Wealthfront currently manages over $4 billion in assets. Wealthfront states on their website that they “use software to better execute time-tested investment strategies” including reduction of risk, taxes, and fees. Their annual fee is only .25% and only requires an initial investment of $500. While enrolling to develop your personalized portfolio, Wealthfront asks a series of survey questions including your age, income, primary reason for investing, your goals with a financial advisor, and a question to gauge risk tolerance. Upon answering these questions, Wealthfront generates portfolio options including a taxable investments mix and a retirement investment mix. These options include a mixture of municipal bonds, natural resources, dividend stocks, emerging market stocks and bonds, foreign stocks, US stocks, real estate and corporate bonds.

Betterment

            On Betterment’s website, the company claim that their long-term investing strategy can help investors earn 2.66% more per year than typical investors. With their smart rebalancing, lowering of taxes and fees, and diversification of portfolios, Betterment believes that they are able to provide strong returns to clients. Betterment offers two versions of their service, Digital and Premium, with .25% and .4% annual fees respectively. The Digital offering requires no minimum balance, and provides low cost personalized financial advice with tax-saving strategies and customer access to licensed financial experts. The Premium offering requires a minimum balance of $100,000 and in addition to the Digital offering provides “indepth advice on investments” including managing 401ks, real estate, and individual stocks, along with unlimited access to CFPs for guidance on life events. Betterment simply asks investors for their age, retirement status, and annual income to begin their digital investment process. With this information, investors are then given the option between three investment goals, including Safety Net, Retirement, and General Investing.

Wealthsimple

            Wealthsimple’s website highlights its convenience and ease by stating that “In just five minutes, we build you a personal portfolio and put your money to work like the world’s smartest investors”. Wealthsimple relies on tracking the market as a whole and using low-fee index funds to reduce the costs of traditional investment accounts. According to Wealthsimple, they have over 40,000 users and over $1 billion in assets under management. Wealthsimple also outlines two product offerings to their clients, Basic for assets of $0-$100,000 and Black for $100,000 +. The basic version requires an annual fee of .5% for the services of tax-loss harvesting, dividend reinvesting and auto deposits and rebalancing in your personalized portfolio. The basic version also offers human financial advice. Wealthsimple Black provides all the basic feature but with increased tax efficiency, goal based planning, and VIP airline lounge access. Wealthsimple prompts potential customers to answer a series of questions to gauge client coals, risk appetite, annual income, age, assets and investment timeframe. The service then provides a portfolio distribution and asset mix of various ETFs with the option of switching between Conservative, Balanced, and Growth levels of risk tolerance, which can be adjusted over time as well. Wealthsimple also offers the option to only include socially responsible investments in your portfolio, which could be a popular feature among socially aware investors.

WiseBanyan

            WiseBanyan provides investors with an extremely accessible product requiring no account minimum and no annual fee. WiseBanyan focuses on eliminating fees and empowering people to begin investing as soon as possible to maximize their wealth. The company only charges customers a fee for specific products or services they request. To sign up, investors take a short survey to provide their investment goals, including “rainy day”, retirement, custom goals, and building wealth. After choosing which milestone, the investor is prompted to select the type of growth ranging from loss avoidance to aggressive growth. After WiseBanyan assesses the customer’s risk tolerance with a few more questions, the customer is provided with a specialized stock and bond allocation that breaks down the percentages of specific securities.