Should a robot manage your money?
Here’s the bottom line on robo advisors:
If you’re a young person starting out, or someone just beginning to invest, a robo adviser will give you a decent investment plan on the cheap.
But don’t expect to pull a blueprint for your financial future out of a computer, and the robot won’t talk you in from the ledge if the next market tumble makes you freak.
With a robo adviser, you deal with a computer, not a person, in planning your investments. You answer a few — perhaps too few — questions online about your income and needs. Out pops a list of low-cost exchange-traded stock and bond funds.
Send in your money, and the robo firm will invest it for you.
There are two advantages here: Robo advisors are cheaper than humans, and the investment choices are usually pretty good.
Betterment, the king of the business, charges a fees of 0.15 to 0.35 percent of assets. People with between $10,000 and $100,000 will pay 0.25 percent to Betterment.
Wealthfront, the No. 2 robo in size, charges nothing for accounts under $10,000, then a fee of 0.25 percent of assets. SigFig will also manage the first $10,000 for free, charging 0.25 percent on more.
With a human advisor, expect a fee of 1 to 1.5 percent of your investment if you have at least $100,000 to invest, plus some backdoor costs that you may not see. With less money to invest, you’ll often pay a bigger percent for human contact, often through sales commissions.
On top of that, you’ll pay the expense ratios in any mutual funds either way you go.
There at least 17 firms in the robo business. You can find a list at bit.ly/25ShKOL.
Low cost makes robos a hit with millennials, who grew up tech-savvy. But it’s also a choice for middle-income people who can’t afford human advice.
“The middle market historically has not been served very well,” says Michael Guillemette, an assistant professor of financial planning at the University of Missouri-Columbia.
The robos’ investment choices are actually good, Guillemette says. He likes their “passive” investment approach, generally using funds that simply match investment indexes rather than trying to beat them.
The exchange-traded funds have very low expenses, certainly compared to the actively managed mutual funds that human advisers often recommend.
“It’s a great way to get things started and accumulate wealth,” Guillemette says. “When it comes to investment advice, you can do far worse.”
The robo firms will rebalance investments when they grow out of sync, and some will sell losing investments to harvest tax losses.
Life is more than investments
But there are some things the computers can’t do, at least not yet.
A good air-breathing adviser will consider all your goals — a new house in five years, college for the kids in 15, retirement in 30 — and get a plan to reach all of those. A good human will make sure you have the right insurance, an emergency fund and a plan for cutting debt, notes Guillemette.
I looked at seven robos and found that some make a weak stab at that. Future Advisor, for instance, will open a tax-free college savings plan. Betterment coaches you on an emergency fund. Some let you gear investments for different time frames: long, intermediate and short.
But life is too messy for a machine. Some families have to save for children with disabilities or support the old folks. A machine can’t hold your hand when the market crashes and you want to sell everything at the moment you ought to be buying.
That said, the human-powered advice business has its own problems. Lots of people end up with bad humans. They find stock jockeys charging big fees for second-rate investments.
There are good advisers in the St. Louis area, and how to find them is a subject for another column.
The robos do try to adjust to a client’s risk tolerance. SigFig and WiseBanyan, for instance, ask lists of questions designed to tell if you’ll sleep at night when your investments lose money. Other robos get by with a single question, which is worrisome.
Some of us have our messy-life stuff figured out without an adviser. If all you need are investment choices, the machine could suffice.
“Robo advisors are good for the investment management part of the plan,” Guillemette says.
For a 40-year-old with moderate risk tolerance, saving for retirement, Wealthfront recommended a mix of cheap Vanguard and iShares exchange-traded funds, or ETFs. The machine recommended placing 84 percent in stocks, half domestic and half international, 5 percent real estate and 11 percent bonds, tilted toward riskier emerging markets debt.
I did find one recommendation puzzling. Betterment and Wealthfront recommended municipal bonds in taxable accounts for investors with $70,000 in income. Munis are best for high-income people looking for tax-free interest. The machines couldn’t know the investors’ tax situation — they didn’t ask.
Some robos have conflicts of interest. For instance, Charles Schwab charges nothing for its robo service but collects money from the ETFs it recommends, some of which are run by Schwab. It also makes money off the 6 percent to 30 percent of investors’ money it sends to cash accounts at Schwab Bank.
So, does Schwab pick investments that benefit the investor, or that pay Schwab?
Some firms marry man and machine, offering robo advice along with a human advisor on the phone. Vanguard, the mutual fund king, has such a service, charging 0.3 percent of assets, but it demands a $50,000 investment. It recommends only Vanguard funds — another conflict of interest.
The pure robo model makes sense for young investors without much money, says Scott Puritz, Managing Director of Rebalance, a man-and-machine firm in suburban Washington, DC. As they get older, life gets complicated and they need a human advisor to sort things out.
For instance, one 70-year-old client said he wanted to leave his savings to his grandchildren. They invested it much differently than if he wanted to spend it on himself.
In some cases, people may think they’re hiring a human, when a robot is doing the work. Robos are selling themselves as behind-the-scenes solutions to human advisors too busy or lazy to manage client investments.
Take Hedgeable, a New York robo firm. It sells robo services directly to the public, and also to human advisers.
In its online pitch, Hedgeable says it’s a solution for advisers who don’t have the time, expertise or licenses to handle their clients’ investments.
“Do you lack the time to provide high quality service to all of your clients?” Hedgeable asks advisors.
Who would want an advisor like that?