Automated investment services promise to make investing easy, inexpensive, and even fun. Sometimes called robo advisors, these companies can take the pain and uncertainty out of investing by constructing a portfolio, investing in ETFs, rebalancing, reinvesting dividends, and even harvesting tax losses.
On the surface robo advisors appear to be virtually identical. Popular options such as Betterment and WealthFront offer a diversified portfolio of low cost ETFs. All an investor needs to do is choose a stock and bond allocation, and the robo advisor does the rest.
A closer look, however, reveals some significant differences from one service to the next. Key differences include the following:
- Cost: The cost of automated investing services range from free to 50 basis points or more;
- Custody: Some services require you to transfer your money to their custodian, while others allow you to keep your investments at well know brokerages;
- Account Types: While all offer taxable accounts and IRA retirement accounts, they don't all offer SEP IRA accounts for the self-employed;
- Investments: Some limit investors to the ETFs selected by the service, while others offer more flexibility;
- Taxes: Some services offer sophisticated tax loss harvesting features, while others do not; and
- Stocks: Some services allow you to invest in individual stocks, although most do not.
These differences are important. Selecting the robo advisor that best meets an investor's needs requires understanding the different features and costs of these services. For that reason, below you'll find an extensive list of popular robo advisors and the key features and costs of each.
Note that I have accounts with or have used Betterment, WealthFront, WiseBanyan, Personal Capital, Motif Investing, FutureAdvisor and Blooom.
Fully Automated Investment Services
Several robo advisors handle virtually every aspect of investing. Once money is transferred to a new account and a stock/bond allocation chosen, the service handles everything from rebalancing to dividend reinvestment to even tax loss harvesting. These services don't offer much flexibility. The ETFs and asset allocation, for example, are determined by the advisor. What they lack in flexibility, however, they make up with the ease of using their service.
Betterment: One of the first robo advisors, Betterment (review of Betterment) has built a robust set of tools to help the most novice of investors. One need only select how much they want invested in stock ETFs and how much in bond ETFs. Betterment provides easy to use tools to help investors make the stock/bond allocation decision. Once made, Betterment allocates the investments across several low cost ETFs.
Betterment's asset allocation favors value ETFs. It does not include REITs or Commodity ETFs on the theory that total market ETFs provide exposure to these asset classes. Taxable accounts of at least $50,000 can take advantage of Betterment's automated tax loss harvesting tools.
There is no minimum deposit to open an account. The fees charged, however, range from 0.15% to 0.35% based on the account balance. The lowest fee of 0.15% is available for accounts with $100,000 or more.
Betterment's most notable feature is its website. It offers beautifully designed tools that make understanding investments a joy.
WealthFront: This automated investment service has Burton Malkiel as its Chief Investment Officer. WealthFront (interview with WealthFront's CEO) offers features similar to Betterment, although there are several notable differences. It's management fee is 0.25% of assets over $10,000, in addition to the ETF fees. It also requires a minimum deposit of $500 to open an account.
WealthFront takes a traditional approach to asset allocation. Specifically, it includes ETFs that invest in REITs (VNQ) and dividend stocks (VIG). It also avoids U.S. government bond funds given the current yields.
WealthFront also takes a unique approach to tax loss harvesting. Those with at least $100,000 invested in a taxable account can take advantage of WealthFront Direct Indexing:
Instead of using a single ETF or Index Fund to invest in U.S. stocks, Wealthfront's Tax-Optimized Direct Indexing directly purchases up to 1,001 individual securities on your behalf — up to 1,000 stocks from the S&P 500 and S&P 1500 indices and an ETF of much smaller companies. This allows us to take advantage of the countless opportunities for tax-loss harvesting presented by the movement of individual stocks, to further improve your investment performance. Combined with our Daily Tax-Loss Harvesting service, we believe this could add as much as 2.03% to your annual investment performance.
WiseBanyan: This robo advisor offers an interesting twist--it's free. The good folks at WiseBanyan (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.
Active Traders
Several robo advisors offer tools to help those looking to invest in individual stocks.
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.
As an aside, I am part of a group of personal finance bloggers competing in a stock market game sponsored by Motif Investing. You can follow the results here.
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. equites, 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.
Final Thoughts
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.
However this plays out, it's good news for investors. Robo advisors are bringing down costs and introducing some incredible tools that will change the investing landscape in profound ways.
