robo advisors

[Travelwanted]

Curious to know if anyone has investigated any of these sites like Betterment or Wealthfront where you pay a low advisory fee based on assets. You dial in your risk and it sets up a portfolio of ETFs. Doesn't seem all that novel to me but I'd like to hear from anyone who knows more about it. I am always open-minded.

http://finance.yahoo.com/blogs/dail...r-portfolios-to--robo-advisors-154448374.html

 

[Rdub]

I use both Financial Engines (free as part of my 401k) and PersonalCapital.com (free tool- they will charge for asset management), but mostly to track my stuff. Financial Engines kicks out a retirement income number and they also provide fund recommendations. They have a simple tool that tells you if you are on track to reach your goals.

I like using Personalcapital.com to track my accounts and performance versus benchmarks. They recently added a feature called the Life Annuity Index, which they define as "The Life Annuity Index (LAI) is a personalized index that reveals your current financial reality, without relying on any assumptions or projections. Given your net worth and current market prices, the LAI measures the monthly income you can receive every month for the rest of your life starting at your retirement. This monthly payment will adjust with inflation to preserve your purchasing power and will not be affected by market fluctuations." I do not use these online tools to figure out which investments I should be in.

With your NW, you should look into a Vanguard Flagship account if you haven't already. They offer a pretty comprehensive retirement analysis for free with the Flagship acct and will help you set up the recommendations if you want them to. They take into account AA and asset location.

I enjoy managing my own assets, which saves a ton of $ on fees/expenses. I invest primarily in Vanguard index funds. This keeps me diversified, my expenses low, and their low turnover helps with tax efficiency.

I have investments at Schwab and Vanguard. I saved quite a bit of money moving my Vanguard funds from Schwab (investor class) to Vanguard (admiral class). It may not seem like much, but if you look at the Vanguard Total Stock index fund, the investor class has an expense ratio of 0.24% while the Admiral class has an expense ratio of 0.05%. On a $1M investment, that is a savings of $1900/year. That amounts to a serious chunk of change over the next 10-50 years.

If you are looking for ways to move away from an advisor to managing your investments yourself, you can start with one of the Lazy portfolios and look into asset location for tax efficiency. There are a lot smarter people than me on this site, but I thought I would pass along a few concepts I use.

 

[readytofire]

I use wealthfront and have been happy so far. Disclaimer: I am pretty clueless when it comes to investing, and am in their target market being a 30 year old IT professional. I like wealthfront because they auto re-balance my portfolio based on my risk tolerance, help out with tax loss harvesting, and focus on extremely low expense ETFs. They keep track of things for me and their fees are fairly low at 0.25%. My portfolio isn't large since I am young and have many more years to save, and I consider wealthfront a good place for me to start out while I learn more about investing. If I gain enough experience and confidence to do it myself, I will do so, but in the meantime wealthfront works well for me.

The size of their wealth managed has been growing substantially, and unlike competitors, their average portfolio size is quite large. This gives me confidence that they are going to be around for a long time, are well funded, and have solid a executive team. Burton Malkiel is their chief investment officer.

Betterment is supposedly similar, but I heard they charge higher fees, although give more personalized investment advice. For my simple needs, I prefer wealthfront's lower fees and set-it-and-forget-it investing strategy. I made the assumption when I registered with them that the cost of my relative cluelessness and lack of attention to my portfolio would result in lower returns, easily equal or exceeding their 0.25% fees.

 

[aim-high]

Just saw that Wealthfront now has over $1B in AUM. Only 0.25% (free if under $10K account) and no trading fees. Along with that, they give you full permission to mimic their trades. Interesting.

https://www.wealthfront.com/faq

 

[ArkTinkerer]

Future Advisor will give you recommendations and checkups for free. You can pay them .5% to do the balancing for you but frankly, why bother when you can do it yourself in a few minutes.

Disclosure: I am using a fee service now. I get discounted fees (institutional shares) on the funds I purchase that replace about half the fee but eventually I see myself going to this type of self management. I self managed for years and went to the fee service for family and peace of mind while I make the major transitions to retirement.

 

[MBAustin]

Kiplinger reviewed several online advisors recently

Best of the Online Investment Advisers, 2014-Kiplinger

Not a lot of detail, but enough info along with pros and cons to at least narrow down the field if you want to go that way.

 

[kevink]

I've been spending some time looking at all of these sites and actually the thing that impresses me most about Betterment is the work they've done on retirement income. Their site has a really interesting article on why the 4% rule isn't likely to work going forward that doesn't duplicate - though it does parallel - Wade Pfau's research. More usefully, they have a pretty sophisticated tool to make sure your porftolio survives for the period you specify while maximizing income:

https://www.betterment.com/resources/retirement/investment-income-retirement/retirement-income-shouldnt-be-a-guessing-game/

Clearly the vast majority of folks on this forum are dyed-in-the-woold DIY types, but I can see a lot of value in these services for those in the accumulation phase as well as retirees who either can't or won't deal with investment complexities or know themselves well enough to have reason to believe their returns will be better by putting things on autopilot.

The big brokerage houses aren't standing by, either: I'm with Schwab at the moment and they're introducing their own Roboinvest plan in Q1 of 2015.

WSJ had a good article on this trend recently, and for those who follow Mr. Money Mustache his latest blog post is on his experince investing 100K with Betterment. Looks like Silicon Valley is well on its way to seriously disrupting the FA business.

 

[MBAustin]

Looks like Silicon Valley is well on its way to seriously disrupting the FA business.

What an improvement that will be!!!

 

[Chuckanut]

Any link available to Schwab's robovest tool?

 

[readytofire]

kevink, that was an interesting article but I saw no mention of inflation or inflation adjustment. It made it hard to examine their example scenarios accurately.

 

[kevink]

Schwab is keeping things hush-hush but does have a teaser about their new service on their home page, with a link in it to sign up to be emailed when it debuts.

Meanwhile Fidelity has already announced it's offering a "white glove" (whatever tha means) version of Betterment to its clients.

I highly recommend reading the Mr. Money Mustache post on Betterment, and in particular taking the time to read through the extensive comments section, in the course of which just about any question one could think of about what they're doing seems to get answered. A poster in that discussion provided a link to what seems to be the most comprehensive discussion of the strengths, weaknessses, fees and specific investment "tilts" of all of these robo-invest sites here:

The Best Robo Advisor … For You | ETF.com

Betterment is the only one of these firms that is fully vertically integrated (they disparage most of their competitors as just being "shiny apps") and certainly they seem to be the most sophisticated of the bunch (Fidelity going with them is obviously not an accident). That said, their allocations are straight out of the DFA playbook, with more international than U.S. stock, yet they use all Vanguard funds.

It's really going to be interesting watching this robo-invest thing unfold, and clearly if you're already with, say, Schwab, Fidelity or Vanguard you're going to have a front-row seat as these firms (not to mention the FA's charging 1.5% a year or more) are going to have no choice but to respond to this disruptive innovation.

 

[Chuckanut]

What interests me most is not having a robo-advisor manage my money, but how one can maximize withdrawals over time, while not increasing risk, using a variable method.

 

[kevink]

I agree with you completely Chuckanut.

Here is the link to the discussion of that topic on Bettermint's site. Towards the end they provide links to tools that Vanguard and J.P. Morgan are offering for the same purpose, but as they point out those tools aren't seamlessly integrated with one's portfolio:

https://www.betterment.com/resources/retirement/investment-income-retirement/why-the-4-percent-rule-is-broken/

Now if one could just access that tool without moving all one's assets into their portfolios.....

 

[Options]

Stopped reading after I got to the part about fees...

"Steel yourself against clever marketing brochures and charming salespeople."

"Planners try to make it all so complicated that you believe you can't possibly manage your finances or make financial decisions without them."
-- Eric Tyson

 

[nun]

I like the underlying financial investing strategy of these firms.....but what value do they offer? Vanguard has an online tool that will suggest a portfolio and they will also automatically rebalance as well.

 

[LOL!]

Here is the link to the discussion of that topic on Bettermint's site. ….

MP Dunleavy wrote the marketing fluff piece for Betterment, so I am glad she has landed on her feet. She used to write many ditzy (and I am being polite) articles for the old MSN Money web site. But the linked piece has no real info and from my reading does nothing different than what one would do automatically themselves. That is, reduce to half the initial portfolio withdrawal rate (2% was mentioned in the article) when times got tough.

The question has always been: Can one reduce their annual expenses to be half of what they were last year?

And the answer has almost always been: Yes, if we eat the free food samples at Costco and other grocery stores and stay home otherwise with the utilities turned off.

But roboadvisers are here to stay and will drive costs down for everyone.

 

[Totoro]

This actually looks decent.

0.15% management fee, automatic rebalacing, tax loss harvesting, no trade fees, ..

The inherent value of their approach I can't assess fully but looks plausible

 

[nun]

This actually looks decent.

0.15% management fee, automatic rebalacing, tax loss harvesting, no trade fees, ..

The inherent value of their approach I can't assess fully but looks plausible

So basically most of the stuff you get for free from Vanguard, Fidelity etc.....I wonder if the costs will go up.....and I just hate giving all my details to yet another faceless internet company.

 

[Totoro]

Vanguard has expenses too.

Granted, 0.05% for the lowest index (VTSAX) but other Vanguard funds have expenses more in the 0.10% to 0.20% range. At higher investment levels you get an advisor on the phone too (not customer service desk).

Not defending this firm, mind you, I'll still go DIY myself. Just saying it seems to be in the same category as Vanguard or Schwab.

In other words, it's not asking 1% - 2% from their customers every year for adding no value

 

[nun]

Vanguard has expenses too.

Granted, 0.05% for the lowest index (VTSAX) but other Vanguard funds have expenses more in the 0.10% to 0.20% range. At higher investment levels you get an advisor on the phone too (not customer service desk).

Not defending this firm, mind you, I'll still go DIY myself. Just saying it seems to be in the same category as Vanguard or Schwab.

In other words, it's not asking 1% - 2% from their customers every year for adding no value

Surely you still have to pay the costs of the underlying funds?

 

[kevink]

Yes, of course you do have to pay the expenses of the underlying funds. I'm fee-phobic too, but if you really look at what Betterment offers in detail they arguably do more than earn their .15% fee in many cases. Yes you get automatic rebalancing in a Vanguard Target Date fund, but those funds are very unsophisticated in their allocations compared to what Betterment and the other top robo-invest companies are offering. If you accept the basics of Modern Portfolio Theory and the work of Fama and French you'd expect at least a couple percent higher returns and a smoother ride getting there over the long term with these more complex, small cap and value tilted, global portfolios.

The tax loss harvesting is also much more sophisticated than anything Vanguard offers, plus they buy fractional shares and keep you fully invested at all times. I'm certainly not ready to make the leap myself, but hey one could do what Mr. Money Mustache did and put 100K into Betterment and compare the returns with DIY over time.

 

[LOL!]

The beauty of something like Betterment is that the clients will have no clue how to compare their returns to a benchmark. The kinds of clients that Betterment will attract are those that are afraid of math. They will have no easy way to figure out if Betterment is helping them or hurting them.

I read one anecdote about pages and pages of transactions which was hard to believe. Nevertheless, understanding what is going in one's account could be a real chore. That is, if one wants to keep tabs on it. I suspect clients will simply have to trust Betterment et al. to be doing what they say they are doing.

 

[nun]

I read one anecdote about pages and pages of transactions which was hard to believe. Nevertheless, understanding what is going in one's account could be a real chore. That is, if one wants to keep tabs on it. I suspect clients will simply have to trust Betterment et al. to be doing what they say they are doing.

It looks like a low cost easy access DFA.....that might be a nice thing. I just don't like to get too complicated, not too many funds and don't fiddle with them too often. I also like to understand exactly whats happening in my accounts and don't need to give my financial details to another faceless internet company.

 

[Chuckanut]

The kinds of clients that Betterment will attract are those that are afraid of math. They will have no easy way to figure out if Betterment is helping them or hurting them.

Exactly. These are the people who probably will benefit most from their service. Otherwise, they will keep their money in low yielding CD's or lose it on some goofy tip they get from a 'friend' who knows somebody.

Or, they are people who are willing to pay a bit extra for the service and to not have to do the math. Nothing wrong with that. The guy who fixes his own car and installs his own water heater may think those who pay a mechanic and plumber are just being foolish.

To each his own.

Note: I would love to see a rigorous academic comparison between a common AA (60/40 stocks/bonds) with yearly reallocation, and Betterment's system.

 

[LOL!]

Note: I would love to see a rigorous academic comparison between a common AA (60/40 stocks/bonds) with yearly reallocation, and Betterment's system.

Why not start a real-world actual experiment yourself? You can put $100K at Betterment and $100K in the Vanguard LifeStrategy Moderate Growth fund. Whenever you contribute/withdraw money to one, do the same to the other.