As new players put their own spin on a growing industry, robo advisors are evolving and replicating the exchange-traded fund industry, which began with passive index-tracking funds and now include endless varieties from sector to actively managed hedging funds.
Business Insider Intelligence predicts that robo advisors will manage approximately $1 trillion by 2020 and $4.6 trillion by 2022. “The first generation of robo advisors offered basic portfolio management and maintenance,” says Will Trout, head of wealth management research at Celent. That standard fare typically consisted of a risk assessment quiz, asset allocation and ETF portfolios to match the investor’s risk profile.
Yet, as competition increases, robo advisors keep adding other services and investments to stand out and attract business. “The robo advisory world is big enough to accommodate many types of players,” says Kalen Holliday, director of communications at robo advisor Interactive Brokers Asset Management, formerly known as Covestor. From plain vanilla WiseBanyan to Hedgeable, which lets you invest like hedge funds do, robo advisors are taking on more flavors than Baskin-Robbins. Here are several distinct varieties to consider.
[See: 7 Robo Advisors With a Human Touch.]
An app for cash-strapped beginners. Technically, Stash Invest isn’t a robo advisor but rather an automated investment app with a feature called Auto-Stash, which lets investors set up automatic deposits from a bank account. You choose the frequency and invest any amount from $5 on up. What sets this app apart from robo advisors and makes it worth including here is that it enables beginners with little money to invest get started with micro investments.
Auto-Stash targets the 109 million underserved Americans by dollar-cost averaging their small contributions into their favorite businesses, says Allyson Federbush, head of communications. Stash helps with asset allocation and asset selection but lacks the rebalancing feature of full-fledged robo-advising competitors like WiseBanyan and Acorns. With 1.8 million users, the app aims to educate small investors and give them access to what might otherwise be out-of-reach financial markets, Federbush says.
Automation with some in-person advice. Sooner or later, all investors have specific questions about their financial circumstances that require assistance from a human financial advisor. Hybrid robo advisors combine automated investment management with in-person advice from a financial planner. This feature is so common that the list of hybrid robo advisors reads like a Who’s Who of automated investing and includes, among others, Personal Capital, Vanguard, Betterment and FutureAdvisor.
As a result, hybrid robo advisors are looking for ways to stand out from the pack, which is where SoFi comes in. This hybrid robo now features certified financial planners that review your entire financial picture. SoFi charges 0.25 percent on amounts greater than $10,000. The first $10,000 was already free, says Rachel Reichblum, SoFi’s senior manager for product communications. As with all hybrid models, check out the financial advisor’s qualifications as they vary among providers.
The no-transfers-needed platforms. Most robo advisors require you to transfer your investing assets to their platform, which is a problem for investors with accounts somewhere else. SigFig and FutureAdvisor, however, manage your investments while they remain in your investment brokerage account. SigFig manages accounts from Fidelity, TD Ameritrade Institutional, Charles Schwab and Wells Fargo, while FutureAdvisor manages Vanguard and Fidelity accounts.
[See: 8 Things to Consider When Choosing an Online Broker.]
Active managment. The first wave of robo advisors was built on the premise that low-fee, market-matching index funds was an investor’s best strategy. Now a slew of robo advisors are adding active management, sometimes with an unusual twist.
Qplum, for example, uses artificial intelligence in its portfolios to try and beat the market. Its active trading strategies are tested against potential future market scenarios as well as back-tested against past market performance. The advanced Flagship Portfolio invests in more than 45 actively managed ETFs from stock, bond and real estate asset classes, diversified across sectors and market caps. Twenty-year back-testing of the Flagship Portfolio found that losses never exceeded 21 percent in a year, even in 2008, when the Standard & Poor’s 500 index fell 36.55 percent. The portfolo’s average annualized returns were 12.2 percent compared to the S&P’s 8.42 percent.
At Interactive Brokers Asset Management, 31 of its 61 portfolios are actively managed by registered investment advisors or hedge fund managers, Holliday says. Interactive Brokers vets scores of registered investment advisors and hedge fund managers for their skills before making these managers available to you. The managers trade your account exactly as they do their own hedge funds or client’s accounts. Each actively managed portfolio also has a risk score, and fees range from 1.5 percent for the Clearbrook Capital Advisors Undervalued Opportunities Portfolio to 0.08 percent for the IB Asset Management Dividend Portfolio.
Like many hedge funds, actively managed robo advisor Hedgeable specializes in downside risk protection while capturing upside growth. The robo does this by varying the percentages in asset classes based on market conditions. Its actively managed portfolios are designed for different levels of risk, and it’s possible that during an extreme market crisis an entire portfolio might be allocated to a risk-free asset like cash for the most risk-averse investors. The portfolios also feature investments beyond the usual fare of ETFs and individual stocks to include less common offerings such as venture capital, bitcoin, commodities, unusual currencies and energy limited partnerships. Fees start at 0.75 percent for portfolios worth up to $49,999 and fall to 0.30 percent for accounts worth $1 million or more.
[See: 8 Commodity Plays Ripe for the Picking.]
An eye on your 401(k). With most Americans investing through a 401(k), Blooom has built its business on helping you, not your employer, make the most of the investments in your plan. The robo manages your existing 401(k) account for $10 per month, selecting the best funds from your plan’s available choices. Blooom chooses funds that have the lowest fees while also matching your risk level, with the goal of saving you money while maximizing your returns.
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The Ways Robo Advisors Stand Apart originally appeared on usnews.com
