By Rico Dilello
Would you trust a robot to manage your money? New technology is upsetting the financial world with the arrival of the start-up digital-advice firms informally known as robo-advisors. These companies are still small; they are positioning themselves to cater to investors who do not have large enough accounts to meet traditional wealth-management minimums.
Many of these robo-advisor firms use proprietary software to determine how investors should allocate their investments. Using their online questionnaires, investors share information such as their age, risk tolerance, time horizon and investment goals. In return, investors receive an investment plan tailored to their individual needs.
Young investors and robo-advisors seem to be a perfect match. Young people are comfortable using and trusting technology. They have been overlooked by the financial (advice) industry because their account balances are too low to be profitable.
Great selling points for robo-advisors are their low fees, plus very low account minimums and in some cases no minimums at all. Basic advice and access to digital tools are free. Advice from an actual certified financial planner (online or by phone) will cost you extra. Some firms also include tax loss harvesting and portfolio rebalancing into the deal.
Here are a few online investment-management players:
- Future Advisor
- Motif Investing
Fees at two of these firms, Betterment and Wealthfront, can be as low as a few dollars a month. Betterment’s has a sliding scale that it charges 0.35 % under $10,000, 0.25 % under $100,000 and 0.15 percent annually on assets of $100,000 or more. Wealthfront charges one fee of 0.25% but no management fee on the first $10,000 and a low investment minimum of $500.00
Both Vanguard and Charles Schwab have reacted to this new trend by rolling out their own robo-advisor services. The Vanguard service requires a minimum of $50,000 and charges 0.30%. Charles Schwab launched its robo platform, called Schwab Intelligent Portfolios, in March. The service requires a $5,000 minimum investment in order to get access to their personal financial advice.
By and large, robo-advisors have set out to serve the substantial number of people who can’t afford a financial advisor, mostly Gen X and Gen Y investors. Apparently, robo-advisors are also enticing an older crowd according to Jon Stein, CEO of Betterment.
“We had a number of customers who are in or approaching retirement.” These “older” customers make up 20 percent of the Betterment’s assets under management.” “They are starting to ask for advice on how to spend down their assets.”
Having worked as a financial advisor, I am bias and very cynical regarding both human and robo-advisors. The financial service industry has a “cover your ass” mentality. Advisors use asset allocation and diversification within their model portfolios to ensure that the client doesn’t lose any money. Clients losing money is bad for business, they tend to go elsewhere for financial advice and it also generates lower revenue from commission fees.
Unfortunately, most of these model portfolios are based on the average returns of both stocks and bonds over the past 20 years. The “Great Recession” is a game changer! I believe that rates of returns going forward on bonds and even stocks are going to be much lower than historic norms. Most financial experts agree that the 6 year bull market in U.S. stocks has been mainly due to below normal bond yields.
In theory, if you are a baby boomer like me, you should have 60% of your retirement funds in lower risk bonds. According to life expectancy rates, you have a good chance of living another 20 to 30 years. Many of today’s baby boomers could very easily run out of money because of low bond yields based on current model portfolios.
When it comes to paying for advice, do your homework! The internet has all kinds of free financial information. Investors can access the same technology that financial advisors use to deliver services to their clients. Considering saving your money, use it to pay accountants for tax advice and lawyers for all your legal needs.
By Rico Dilello
Rico Dilello lives in Canada and has a degree in Economics. He started his own business when he was in his late twenties and then enhanced his degree by completing several courses in order to become a financial advisor. He has enjoyed a very long, successful career as an entrepreneur and is now in his early 60’s and retired. His blog is called Smart Money.