While personal finance and investing are absolutely personal to the individual – no “one size fits all” – the advent of robo-advisors has transformed the investing landscape. Robo-advisors make investing more accessible for everyday people who do not have the time, talent, or interest in taking control of their investing decisions. Before robo-advisors, busy professionals would often seek the assistance of a professional broker, financial planner, or money manager, which could prove quite costly. The question for the average Joe with access to today’s technology is: does the lower cost of robo-advisors equal an automatic win for investors?
Since debuting following the financial crisis in 2008, robo-advisors recently reached total assets under management (AUM) of $1 trillion. While the COVID-19 pandemic and subsequent stock market volatility have taken some of the wind out of the sails of this growth, the ease-of-use approach that robo-investing takes can make it easier for some investors to weather the storm. Coming out of the pandemic, growth in AUM could be expected, but time will tell.
The obvious argument in favor of robo-advisor services is ease-of-use. It allows busy professionals and those uninterested in the investment world to automate investing in accordance to their personal goals, time horizon, and risk tolerance. The advanced algorithms used by robo-advisors factor in historical and current data, expected returns per asset class, and a myriad of other intricacies. Ultimately, it is the individual investor who decides how much to invest, how often to invest, and if/when to withdraw from the account.
Robo-advisors cannot guarantee against the risk of financial loss, however, as evidenced in the most recent market decline. There is always risk when investing. Therefore, it is important to do your homework and decide what platform best suits your needs.
Some robo-advisors available for 2020
A robo-advisor option that may be friendlier for beginning investors is Wealthfront. Wealthfront manages over $20 billion in AUM. The minimum account requirement is a smaller $500, which makes it accessible to a larger audience.
The fees charged for the service as a reasonable 0.25% for the majority of account types, and most routine services (transfers, withdrawals, etc.) are free of charge. Do note that 529 plans have a fee of 0.46-0.49%.
With the accessible account minimums, low fees, and ease-of-use, Wealthfront provides opportunities for investment novices to get their feet wet. Additionally, Wealthfront provides advice and goal planning assistance.
An added perk that Wealthfront offers is the ability to borrow against the value of your portfolio. If credit markets freeze up and lending sources become harder to find, this could be valuable.
Betterment currently manages approximately $22 billion AUM in 500,000 user accounts. Betterment’s accessibility is very friendly to investors of all ages and investable assets. There are no account minimums, providing the ability for all investors to participate.
- Digital-only customers: 0.25%
- Premium plan: 0.40%
- Accounts that exceed $2 million (digital-only): 0.15% on balances >$2M
- Accounts that exceed $2 million (premium plan): 0.30% on balances >$2M
- Underlying ETF MERs: 0.07%-0.15%
Betterment also provides asset monitoring services for Betterment investors and non-investors alike. By using this service, you can see the sum total of all investments and how they’re invested under one view. For taxable accounts, Betterment offers tax optimization, granting the investor the potential for greater after-tax returns
In addition to zero account minimums, Betterment has planning tools that can help investors of all ages and experience-levels. Investing options are plentiful under Betterment’s roof. From recommended portfolios to socially responsible investments, Betterment’s offerings will provide a plethora of options.
Bonus for Canadian investors:
Established in 1999 and headquartered in Toronto, Canada, Questrade has over $9 billion in AUM, and is Canada’s fastest-growing online brokerage. As of 2014, Questrade dove into the world of robo-advisor portfolios by launching the service Questwealth. Questwealth is a managed portfolio that grants the option to take advantage of tax-loss harvesting, automatic rebalancing, human and automated advice, and socially responsible investing.
As with all investment platforms, there are associated fees for the services provided. Questwealth’s are as follows:
- 0.25% for accounts $1,000-$99,999
- 0.20% for accounts $100,000+
- Fund level MERs (managed expense ratios) which range 0.17%-0.22%
- 0.25-0.35 for RSI accounts
Given that Questrade, and its subsidiary Questwealth, are established players in the Canadian market, it stands to reason that investing with them adds no additional risk. No hidden fees, secured accounts, and a trusted financial services provider are what you can expect from Questrade.
Are robo-advisors right for you?
Nothing in this life comes for free, and robo-advisors are no exception. So the question becomes: is the added cost of a robo-advisor worth it in the long-run? The all-in cost of such services can vary, so consider your personal situation/needs and what’s important to you when choosing how and where to invest. Our take is that robo-advisors can be useful under certain circumstances. For investors who are so nervous of picking the wrong investment mix that they just sit on the sidelines, for those who do not have the time to do it themselves, or for those who simply do not want the burden of making those choices are examples for whom the service may be well-suited. Also, money held in cash at robo-advisors may be protected by FDIC. Ultimately, it is up to you.
Our take is that robo-advisors can be useful under certain circumstances. Three common profiles are:
- For investors who are so nervous of picking the wrong investment mix that they just sit on the sidelines, a robo-advisor can serve as an appropriate service.
- For professionals who are too busy to make the investment decisions, and would otherwise pay higher fees for individual advice/money management
- For those who simply do not have an interest or ability to invest wisely for themselves.
If you do decide to invest with a robo-advisor, be sure to do your own due-diligence and invest according to your individual circumstances.