Over time, I have found that, for myself, the easiest way to get the most consistent results in life is to automate a task. If I set up auto bill-pay, my bills get paid on time. If I set automatic reminders, I remember all special events. The same is true with investing. You always hear the advice from all the personal finance gurus — pay yourself first. How much better would that work if you automated your entire investment system?
There are four main investment services called “robo-advisors” — Betterment, Wealthfront, Personal Capital and traditional online brokers, like TD Ameritrade. They all base their service on Modern Portfolio Theory — asset allocation, diversification, and rebalancing are all part of a goal-oriented investment strategy built on time-tested economic concepts. Each robo-advisor option provides the five basic ways to drastically increase wealth over time, which I outline in this post.
Robo-advisors help keep expenses low, which is critical to building long-term wealth. They also provide an automatic way to build a diversified portfolio. Asset allocation and diversification across many asset classes is key to building wealth. They automatically re-balance the portfolio to keep the asset allocation percentages intact. Each service makes it easy to automatically contribute to the plan. You can set up an automatic plan to add money from your checking account into your investment account. And each robo-advisor automatically invests the dividends earned back into your investments. This increases the impact of compounded return over time because you start to get dividends being paid off your re-invested dividends — a beneficial cycle, indeed.
Each service has its pros and cons. Let us dig a little deeper and go into a detail about each.
Betterment is one of the most well-known of the robo-advisors. They have over $7B+ in assets under management. Of all robo-advising options, Betterment’s service provides the best design and user experience. The site is structured so that you can have one or more goals, with each goal having an estimated time horizon (how long until you need to reach the goal). Then for each goal, you can build a portfolio based on your risk tolerance and time horizon. The site will then build an automatic portfolio for you, designed to achieve your specific goal and invest the correct amount of stocks and bonds to create a well-diversified asset allocation. It’s simple. It works. The site also allows you to track your other investment accounts that may be on other sites or offline, which allows you a total picture of your investment portfolios.
I have two concerns to mention about this platform. One concern is that Betterment uses only stocks and bonds in its asset allocations. It does not invest any portion of the portfolio in alternative assets like gold, commodities or real estate. I believe the alternative asset class is important to building a truly diversified portfolio. My second concern is that I have seen the CEO of Betterment on multiple shows on CNBC and Bloomberg, and his answers to questions raise concern. He does not come off as a leader who has integrity. For example, on one show, he guaranteed Betterment could beat the S&P by 1% to 2% per year because of “tax efficiencies.” Hmm. So, that gave me a little pause, but overall I like the product.
Wealthfront is one of the main independent robo-advisors and probably the most famous in Silicon Valley. They have just under $3B in assets under management. One thing that is a little lame with the Wealthfront platform is that they assume the only goal you have is for retirement. They have not kept up with some of the rich features that their competitors provide. The design of the site doesn’t take into consideration that you may want a long-term goal like purchasing a home or saving for college. However, Wealthfront has the best set of asset classes in their investment portfolio mix, in my opinion. They use stocks, bonds and alternative investments in their asset allocation strategy. I believe in their CEO, but time will tell whether these independent robo-advisor services can survive against the competition from the “big boys” like Vanguard, Schwab and TD Ameritrade, as they all have now come out with similar services.
Personal Capital is an interesting option for a couple of reasons. Like its independent brethren, it provides robo-advisor services to build portfolios and manage the investment process. Personal Capital is a little different in that they also have financial consultants who can answer questions and help you along the process. They have slightly higher expense ratios when compared to Wealthfront or Betterment, but if you want to be able to talk with someone, it might be well worth it. Personal Capital’s website is well designed and provides a positive user experience. They also have a free tool that will help you track other investment accounts. If you link them, Personal Capital will provide recommendations and analysis of your other accounts. They also have some other personal finance features that others do not have.
TD Ameritrade Essential Portfolios, Vanguard’s Advisors Service & Schwab’s Intelligent Portfolios
All of these companies have now built their own robo-advisor service. Each have slight differences, but they allow you all sorts of options to build an intelligent portfolio and automate the investing process. If you have an account with any of the companies already, it may be worth checking out their robo-advisor service.
So, I hope I’ve helped describe some of the differences in the robo-advisor market. These services are the wave of the future because they have reduced expenses and they use index funds that outperform most active managers. They also make investing much easier because they automate the investing process. I recommend you check out each of these and see if one might be a good fit for your situation.
Disclaimer — The above references an opinion and is for information purposes only. It is not intended to be investment advice.