Every year, there’s more to manage in our lives. With new technology, promising to simplify our lives, it appears the reverse is true. Our lives get more and more complex. By the way, does anyone know how to work an Apple (ticker: AAPL) watch?
But there is also a growing simplification trend — productivity hacks, minimalism and how to simplify daily tasks. This trend, with its large following, has drifted into the investing sphere. And robo-advisors are answering consumers’ desire for simplification.
Is 2017 the year to let the robot manage your investments? Fin-tech aficionados are jumping on the robo-advisory bandwagon in ever-increasing numbers as the number of firms offering these low-fee, automated investment options explodes.
To date, there are more than 20 robo-advisory players with new entrants every month. And if these aren’t enough choices, many individual financial advisors are also adding automated investment advisors to their platforms as well.
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Why are robo-advisors taking off? There are several reasons for the popularity of automated investment advisors. First, is the attractiveness of index fund investing. Abundant clinical research validates the difficulty of active mutual funds and stock pickers to beat index fund investing. Although there are many reasons that index fund returns beat those of the actively managed counterparts, a primary factor is cost.
Morningstar reported that across all funds, the asset-weighted fund expense ratio was 0.64 percent in 2014. Compare that with a rock-bottom expense ratio of 0.05 percent for Vanguard’s Total Stock Market Index ETF ( VTI). It’s simple, if 0.59 percent more of your money is going into the investment markets instead of the fund manager’s pockets, you’ll likely improve your investment returns.
Additionally, millennials with their comfort with technology are contributing to the robo movement.
Robo-advisors, although not all alike, claim lower fees than traditional investment advisors. Most of the automated advisors also use low-fee exchange-traded funds within their offerings. Ultimately, robo-advisors’ winning formula combines low management fees with low expense ratio ETFs and professionally managed investment portfolios.
How the typical robo-advisor works. You begin by answering several questions that uncover your age, investing time horizon, risk tolerance and existing assets. Next, the computerized program creates a personally tailored investment mix based upon your questionnaire responses.
In general, your assets will be funneled into several predetermined investment portfolios in conservative to aggressive proportions. The conservative portfolios, for risk-averse investors, lean toward greater percentages of fixed assets. The more aggressive portfolios have higher percentages of stock ETFs. The robo-advisor rebalances your investments back to the original mix regularly. Some platforms offer tax-loss harvesting, by selling winners and losers to minimize your tax bill. Most robos offer apps for investing on the go as well.
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There are various distinctions between the robo-advisory firms. TradeKing Advisors offers 19 investment funds across a wide range of asset classes. Personal Capital includes individual stocks in their managed portfolios along with a free financial management dashboard. SigFig doesn’t hold your investments in its account, but manages your holdings in a TD Ameritrade, Schwab or Fidelity account.
The distinctions include types of accounts and access to financial advisors. The types of robo-advisory accounts varies from typical investment accounts to a variety of IRA’s, 401(k)s, and even business 401(k) retirement accounts at Betterment. Several robo-advisors offer users access to financial advisors along with their computerized investing platforms.
What are the fees and minimums? WiseBanyan is a robo-advisor with no minimum investment amount and zero management fees. Betterment allows access with $100 for signups with their auto-deposit. Others have higher minimums and are geared toward more established investors.
Vanguard Personal Advisors, one of the largest robo-advisors, requires a $50,000 investment portfolio minimum. Like Personal Capital, Vanguard also gives users access to an investment advisor. Investors with $5,000 can get in on the Schwab Intelligent Portfolios platform.
The management fees are based upon a percent of your investment account value. Fees range from zero at WiseBanyan on up to 0.69 percent or higher in some cases. The most common range for robo-advisory management fees is in the 0.15 percent and 0.49 percent range, depending upon the firm.
Ultimately, if you’re looking for a well-managed investment portfolio that uses sophisticated modern portfolio management theory, you might let a robot manage your investments this year.
Why a robo-advisor may not be for you. With the exception of WiseBanyan, you will pay a fee for the portfolio management. Although in most cases the management fees are below those of human financial advisors. Yet, if you are a DIYer and are comfortable choosing a slate of low-fee index ETFs or mutual funds, rebalancing every year or so, then you may not need the robo-advisor’s services.
What if you want excessive hand-holding or have a very complicated financial situation? In those cases, a traditional financial advisor may be better for you.
If you’re an investor seeking to buy and sell call options or actively trade stocks and bonds, you’re not a great candidate for a robo-advisor.
The limited number of fund choices in most robo-advisors platforms may not be suitable for you. If you’re seeking greater diversification and opportunities to invest in broad asset classes beyond stocks, bonds, or an occasional REIT or commodities fund, then a robo-advisor might not be suitable.
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If you’re looking for basic investment management, at a low fee, then go robot in 2017. For DIYers or those with large portfolios and sophisticated tax situations, you may be better off with another investment strategy. Regardless of whether you jump on the robo-advisory bandwagon in 2017 or not, it’s clear that these digital investment advisors are infiltrating the investment landscape in a big way.
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Can a Robot Manage Your Money in 2017? originally appeared on usnews.com
