Robo-Advisors

How to evaluate and choose on online financial advisor

A "Robo-Advisor" (also spelled Robo-Adviser) is a financial advisory firm that uses a website and software to automate the process of investing in an asset allocation. These companies are also called "online financial advisers" or "online advisory platforms." Each Robo-adviser has a website where you login to see your asset allocation and your investment performance.

 

Pros of using a Robo-Advisor: 

  • Roboadvisers provide an asset allocation for each risk appetite and specify the funds to buy
  • Roboadvisers automatically rebalance your portfolio, buying and selling funds as needed to maintain your target asset allocation. Some will even optimize your portfolio for tax considerations.
  • Roboadvisers typically charge lower fees than a local financial advisor. For example, Wealthfront charges 0.25% of assets, and local financial adviser typically charges at least 300% more (0.75% of assets)

 

Cons of using a Robo-Advisor

  • Roboadvisers are expensive compared to using a model portfolio for asset allocation. For example: a model portfolio publisher might charge a fixed fee of $249 per year. Wealthfront charges 0.25% of assets, or $1,250 if you have $500,000 invested. So in this case Wealthfront is five times as expensive.
  • Roboadvisers are new and do not have much track record
  • Many Roboadvisers publish their fixed asset allocations and you could replicate them on your own at a discount broker.
  • Most Roboadvisers use static (fixed) portfolios with quarterly or annual rebalancing, so you are unable to avoid or benefit from monthly market changes

 

Questions to ask a Robo-Advisor:

  • What is the 7-year performance history for each of your asset allocation portfolios?
  • Can I see a risk vs. return graph for all your portfolios compared to the market, including the 2008 downturn?
  • What is maximum drawdown (largest percentage loss) for each of your asset allocation portfolios over the last 7 years?
  • How have your asset allocation portfolios performed compared to the leading all-in-one allocation funds, such as Vanguard Wellington (VWELX), Vanguard Wellesley (VWINX), or Janus Balanced (JANBX)?

 

List of Online Financial Advisors


WealthFront   location Palo Alto, CA   year founded 2011   phone 650.249.4258   advisory fee 0.25%   lower fee for larger accounts? No   account minimum size $5000   additional fund fees? Yes, for ETFs   additional trading commissions? No   investing style passive/strategic/static   invests in what? ETFs   portfolio transparency yes   assets under management $1,000 million   registered Investment Advisor? Yes   account aggregation? No   rebalancing included as part of the service? Yes   rebalance notifications? included   rebalancing tool or automation for DIY? not applicable (rebalancing is part of the service)   custodian of assets Apex Clearing Corporation (Apex)   tax-loss harvesting? Yes   website www.wealthfront.com


Personal Capital   location Redwood City, CA   year founded 2009   phone 855-855-8005   advisory fee 0.95%   lower fee for larger accounts? Yes   account minimum size $100,000 (household total)   additional fund fees? Yes, up to 0.11%   additional trading commissions? No   investing style active/tactical/dynamic   invests in what? stocks and ETFs   portfolio transparency yes   assets under management $300 million   registered Investment Advisor? Yes   account aggregation? Yes   rebalancing included as part of the service? Yes   rebalance notifications? included   rebalancing tool or automation for DIY? not applicable (rebalancing is part of the service)   custodian of assets Pershing Advisor Solutions   tax-loss harvesting? Yes   website www.personalcapital.com


Betterment   location New York, NY   year founded 2008   phone 888-428-9482   advisory fee 0.35%   lower fee for larger accounts? Yes   account minimum size $0   additional fund fees? Yes, for ETFs   additional trading commissions? No   investing style passive/strategic/static   invests in what? ETFs   portfolio transparency yes   assets under management $406 million   registered Investment Advisor? Yes   account aggregation? No   rebalancing included as part of the service? Yes   rebalance notifications? included   rebalancing tool or automation for DIY? not applicable (rebalancing is part of the service)   custodian of assets Betterment Securities   tax-loss harvesting? Yes   website www.betterment.com


FutureAdvisor   location San Francisco, CA   year founded 2010   phone 415-379-0098   advisory fee 0.50%   lower fee for larger accounts? No   account minimum size $10000   additional fund fees? Yes, up to 0.59%   additional trading commissions? Yes, usually up to $10 per trade   investing style passive/strategic/static   invests in what? ETFs   portfolio transparency yes   assets under management $13 million   registered Investment Advisor? Yes   account aggregation? Yes   rebalancing included as part of the service? Yes   rebalance notifications? included   rebalancing tool or automation for DIY? not applicable (rebalancing is part of the service)   custodian of assets TDAmeritrade or Fidelity   tax-loss harvesting? Yes   website www.futureadvisor.com


Asset Builder   location Plano, TX   year founded 2007   phone 972.535.4040   advisory fee 0.45%   lower fee for larger accounts? Yes   account minimum size $50000   additional fund fees? Yes, up to 0.45%   additional trading commissions? Yes, up to $50 per trade   investing style passive/strategic/static   invests in what? mutual funds   portfolio transparency yes   assets under management $650 million   registered Investment Advisor? Yes   account aggregation? No   rebalancing included as part of the service? Yes   rebalance notifications? included   rebalancing tool or automation for DIY? not applicable (rebalancing is part of the service)   custodian of assets Schwab    tax-loss harvesting? Yes   website www.assetbuilder.com/


SigFig   location San Francisco, CA   year founded 2011   phone (855)-9-SIGFIG   advisory fee $120 per year   lower fee for larger accounts? No   account minimum size $2000   additional fund fees? Yes, up to 0.18%   additional trading commissions? No   investing style passive/strategic/static   invests in what? ETFs from Vanguard, iShares, Schwab   portfolio transparency yes   assets under management $0.3 million   registered Investment Advisor? Yes   account aggregation? Yes   rebalancing included as part of the service? yes   rebalance notifications? included   rebalancing tool or automation for DIY? Yes   custodian of assets TDAmeritrade (preferred), Fidelity, or Schwab   tax-loss harvesting? No; planned   website www.sigfig.com


MarketRiders Portfolio Manager   location Palo Alto, CA   year founded 2008   phone 866-990-3837   advisory fee $149.95 per year   lower fee for larger accounts? No   account minimum size $0   additional fund fees? Yes, for ETFs   additional trading commissions? No   investing style passive/strategic/static   invests in what? ETFs   portfolio transparency yes   assets under management 0   registered Investment Advisor? Yes   account aggregation? No   rebalancing included as part of the service? No   rebalance notifications? Yes; lists trades needed   rebalancing tool or automation for DIY? No   custodian of assets broker relationships (not custodial) with Schwab, Scottrade, TDAmeritrade, E-Trade, Fidelity, Vanguard   tax-loss harvesting? No   website www.marketriders.com/