Critical Stuff: A Robot Investment program might provide the discipline you need.
In This Chapter: I need control-we all need control. Simple but smart.
I’m not a robot without emotions-I’m not what you see.
I’ve come to help you with your problems, so we can be free.
I’m not a hero, I’m not a savior, forget what you know.
I’m just a man whose circumstances went beyond his control.
Beyond my control-we all need control.
I need control-we all need control.
STYX lyrics to Mr. Roboto are property and copyright of their owners.
Lots of cutting and pasting and swiping from other people’s blogs going on in this chapter, and Robo advisors are a fast-changing market segment. You can assume that everything you are reading is out of date, but at least you’ll get the concept and an idea of how each company is implementing it.
If you like the idea of Modern Portfolio Theory (MPT), but you suspect you might not have the discipline or knowledge to properly manage such a portfolio, then a robo manager might be a great choice for you. There are quite a number of them now, and you might find some feature in one of the smaller ones that leads you to prefer it, but the two biggest players currently are Betterment and WealthFront. The two leaders look a lot alike, but there are important differences that we’ll cover. Some of the newer competitors offer substantially different services. We’ll cover those as well.
What do they do and how do they work? The two leaders take a similar approach–they invest a specific amount of money for you using highly diversified low cost Exchange Traded Funds with MPT as their core discipline. We’ll cover ETFs in a later chapter, but suffice it to say that an ETF is a lot like an idex fund, but they are publically traded like a stock, and you aren’t really buying a little slice of all the stocks when you buy an ETF, you’re buying the ETF.
You choose a stock and bond allocation and the Robo system constructs the portfolio, invests in the ETFs and takes care of rebalancing and tax loss harvesting. For Betterment and WealthFront the portfolio is largely fixed with whole-market index funds (both US and international) and diversified bond funds. Some of the other robos offer more flexibility. You might consider the inflexibility to be a problem, but it’s the accepted way to implement MPT.
The other big variations are cost, custody and account types. The fees range from free to 50 basis points (0.5%) with Betterment and WealthFront in the 0.15 to 0.35% range depending on the amount invested. That sounds great when compared to 1 to 1.5% for a financial advisor that might be screwing you with conflicts of interest, but it’s not insubstantial, especially for an automated service offering a simple portfolio and management services that you could implement yourself. Some of the services (Betterment and Wealthfront included) require you to transfer your accounts to their custodian while others offer a choice of leading custodians. All of the robos I’ve found will manage both Taxable and IRA accounts, but some don’t handle SEP IRA.
Generally, the more complete the automation is, the less flexibility the robo offers. You give up flexibility for ease of use. But the tradeoff is not just a matter of the limits of automating complexity, it’s investment style. The rules of MPT are fairly simple and the Boglehead-style simple portfolio is what these companies are aiming to implement. If you’re looking for a more active trading style you need to look elsewhere.
Betterment was one of the first robo advisors and they currently have the most sophisticated website. Their web developers are clearly top notch. The tools they provide are very helpful for investors at any level of experience. There’s a useful review here. Initially it was fairly expensive, but that’s been changed. Betterment is a registered investment advisor, and securities in customer accounts are protected up to $500,000 with Securities Investor Protection Corporation (SIPC). Before you get all warm and fuzzy about that protection, understand that SIPC isn’t equivalent to FDIC bank account protection. We’ll cover SPIC protection in the section called “What’s insured, and What Isn’t”.
Many people will use betterment as a savings investment vehicle, connecting to their checking account directly and sending periodic sums of money to the account–either automatically or directed or both. The lowest level Betterment Account is called a Builder account with a fee of 0.35% per month. The range is $0 to $10,000 with a minimum of $100 per month auto deposited from your bank account. If you don’t set up auto deposit they charge you an additional $3 per month. For all levels there are no trade fees, no transaction fees, and no rebalancing fees. Betterment changes their fees fairly often, so don’t trust my numbers. The growing number of robo-advisors has undoubtedly put pressure on their fee structure.
From $10,000 to $100,000 the fee is 0.25%. Above $100,000 it’s 0.15%. So if you have $9999 in a Betterment fund they charge $24.99 per year. If you if you have 99K they charge you $247.50 per year. If you have $100K they charge you $150. At $1,000,000 the fee is $1500. All that feels pretty reasonable , especially if you’ve been recently hosed by a financial advisor or broker. The primary question of course is what will they do for that money, and the answer depends more on your nature than on theirs. For you to duplicate what they do manually will certainly take some of your time. If you have the discipline and the time, then go for it. If there’s something better you could do with your time then a Robo is a good deal.
The asset mix at Betterment has evolved recently to include international stocks and bonds, which was previously (and oddly) missing. The current stock portfolio is:
US Total Stock Market Vanguard U.S. Total Stock Market Index ETF (VTI)
US Large-Cap Value Stocks Vanguard US Large-Cap Value Index ETF (VTV)
US Mid-Cap Value Stocks Vanguard US Mid-Cap Value Index ETF (VOE)
US Small-Cap Value Stocks Vanguard US Small-Cap Value Index ETF (VBR)
International Developed Stocks Vanguard FTSE Developed Market Index ETF (VEA)
Emerging Market Stocks Vanguard FTSE Emerging Index ETF (VWO
and the bond portfolio is:
Short-Term Treasuries iShares Short-Term Treasury Bond Index ETF (SHV)
Inflation Protected Bonds Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
US High Quality Bonds (IRA accounts) Vanguard US Total Bond Market Index ETF (BND)
National Municipal Bonds (Taxable accounts) iShares National AMT-Free Muni Bond Index ETF (MUB)
US Corporate Bonds iShares Corporate Bond Index ETF (LQD)
International Developed Bonds Vanguard Total International Bond Index ETF (BNDX)
Emerging Market Bonds Vanguard Emerging Markets Government Bond Index ETF (VWOB)
According to Betterment’s site, their asset allocation favors value ETFs. They do not offer REITs or Commodity ETFs. Taxable accounts of at least $50,000 can take advantage of Betterment’s automated tax loss harvesting tools.
WealthFront: WealthFront is a relatively new Robo, but it has grown quickly, probably because of it’s enhanced tax loss harvesting features. They currently manage about 2.2 billion in funds. The rest of their features are similar to Betterment, with some pricing and fund offering differences. Their management fee is 0.25% of assets over $10,000 plus ETF fees. The investment strategy is a relatively pure MPT approach plus REITs. They currently do not offer U.S. Governments bonds because the yield is so low.
WealthFront offers advanced tax loss harvesting for people with more than $500,000 invested in a taxable account. Instead of using an ETF or Index Fund to invest in U.S. stocks, Wealthfront’s Tax-Optimized Direct Indexing directly purchases up to 1,000 stocks from the S&P 500 and S&P 1500 indices and an ETF of much smaller companies. This allows them to harvest tax-losses directly from the change in value of individual stocks. According to WealthFront’s analysis this enhanced tax loss harvesting can add as much as 2.03% to annual investment performance of the taxable accounts. Lovely if it’s so. There’s an interesting whitepaper on the process here . Okay, it’s not “The Martian”, but it’s not very long and it’s in English.
WiseBanyan: This robo advisor offers an interesting twist–it’s free. The good folks atWiseBanyan (interview of WiseBanyan’s co-founder) believe that asset allocation is a commodity that they can offer at no charge (the ETFs still charge a fee) while making money by selling add-ons. One such add-on which will launch soon is tax loss harvesting. But for those with retirement accounts that can’t benefit from TLH, WiseBanyan should be a serious consideration.
Robo Advisors That Work With Existing Brokerage Accounts–There are several automated advisors that do not require investors to transfer funds out of existing accounts. Instead, the advisor manages the asset allocation, rebalancing and dividend reinvestment from within an existing account. These services also offer asset allocation advice for those who prefer to manage their own accounts.
FutureAdvisor: Working with Fidelity and TD Ameritrade, FutureAdvisor(FutureAdvisor review) offers a robust investment evaluation tool. Users can connect their existing investment accounts to FutureAdvisor’s tool for free. FutureAdvisor then evaluates the investments based on performance, diversification, fees, and taxes.
In addition, FutureAdvisor recommends changes to an investor’s asset allocation. Its recommendations walk through which existing investments should be sold, what new investments should be purchased, and why. The tool even allows investors to reject some of the recommendations, in which case FutureAdvisor will reevaluate the remaining investment recommendations. The tool considers the tax consequences of selling an investment as part of its evaluation.
For an annual fee of 0.50%, FutureAdvisor will implement the recommendations, including future rebalancing and dividend reinvestment. For those with a Fidelity 401(k) that offers BrokerageLink, FutureAdvisor can also manage an investor’s 401(k).
Blooom: Unique among robo advisors, Blooom helps investors manage 401(k) retirement accounts. This presents two significant challenges. First, the service must be able to work with countless firms managing 401(k) retirement accounts. Second, it must be able to work with the investment options available in each 401(k). Blooom has managed to overcome both challenges.
Users can connect their 401(k) to Blooom and generate an analysis of their investments. Blooom uses the image of a flower to show its evaluation. A beautiful flower means the investments are spot on in Blooom’s opinion. A wilted flower with a fly on it means there’s work to be done. Blooom then recommends changes to the portfolio.
For $10 a month, Blooom will implement the asset allocation it has recommended and rebalance the account to keep it in line with the plan.
Several robo advisors offer tools to help those looking to invest in individual stocks. Not a wise choice for serious retirement savings, but if you have some mad money to play with that you are willing to take a risk with, then have at it. Not for me, but then I don’t buy lottery tickets either.
Motif Investing: For those interested in active trading, Motif Investing (Motif Investing review) offers a unique spin on the robo advisor space. More closely aligned to a brokerage firm, Motif enables users to create a basket (called a motif) of stocks and ETFs. Once built, an investor can buy a motif of up to 30 stocks and ETFs for $9.95. Investors can create their own motifs, invest in motifs built by Motif Investing, or invest in motifs built by other investors on the platform.
Motifs range from the traditional (e.g., Index Fan motif consisting primarily of Vanguard ETFs) to the more exotic, such as one motif called the Caffeine Fix that buys coffee related investments.
Personal Capital: Last on our list is a service that combines sophisticated investing tools with a real live investment advisor. Personal Capital has become known for its free financial software to track your investments. Beyond the software, however, Personal Capital offers wealth management services for accounts of $100,000 or more. For U.S. equities, Personal Capital uses tactical weighting through individual stock investments in contrast to more traditional indexing. Clients use Personal Capital’s software to track their investments, asset allocation, and fees. The cost for its services starts at 0.89% of assets under management.
The robo advisor space is young. Most entrants are not profitable, instead relying on significant venture capital funding. The industry, however, is growing. Several companies already have over $1 billion under management.
The big mutual fund companies are taking notice. Fidelity recently partnered with Betterment to offer the robo advisor’s tools to investment advisors that use Fidelity’s platform. Charles Schwab has announced that it will introduce its own automated investment tool soon.
Note: This chapter is particularly heavy with lifted content that I gathered from a site I haven’t been able to locate again to give proper credit. If the author contacts me I’ll be glad to provide credit and a link to your site.