What About Tech Financial Innovation? The story of Robo Financial Advisors

How far has investing come when it comes to technological implementation? The latest innovation comes in the form of Robo Advisors. These virtual investment advisors learn about your financial situation by asking you a few automated questions related to your age, financial goals, risk tolerance etc. Depending on your answers you will get the portfolio which could help you achieve your financial goals over the specified time period you select, which is usually long term.

On the other side of the spectrum are Financial Advisors. These are people tasked with investing your money, educating and ensuring you are on track towards meeting your financial goals. FAs provide this in return for a fee. Having an FA could be appropriate for individuals with more complex financial situations that require a more insight in managing. An individual may also deem they need an FA when they don’t have the time to manage their money or lack the confidence. For the rest of us, the financial goals can be boiled down to pretty simple amount of money we currently have versus how much we will need at the point we retire. Guiding investors to that point is exactly what robo-advisors do. On the concept of “time”, how can one say they don’t have the “time” to learn/take care of their investments. Isn’t your money important? Remember — you’re born and you die. Everything in the between is time!

What are some Robo-Advisors? Examples of Robo advisors are Betterment, Wealthfront, Charles Schwab Intelligent Portfolios, Fidelity Go, Wealthsimple, Motif, E-Trade Core Portfolios, Acorns, Stash etc.

Charles Schwab and TD Ameritrade have dominated the space with Assets Under Management…

Robo Assets Under Management in $ millions (Source: SEC ADV)

…Stash and Acorns have attracted the most individual customers…

Number of individual accounts at each robo advisor (Source: SEC ADV)

Stash and Acorns have average account balances from $100 to $300 versus Schwab and TD Ameritrade average account balance of $100,000 to $125,000. Betterment and Wealthfront fall in the middle with $35,000 to $50,000.

How are robos different from regular financial advisors? Basic robo packages do not provide human interaction. When the market sells off or you experience losses you will not get a call from your robo to assure you that everything will be okay, or what you should do. Also, if you have a peculiar investing situation where you have other portfolios, robos will not look at your investment holistically and adjust your robo portfolio.

What’s the benefit then? Most of us smaller investors (anywhere from $1 to $250,000) do not have a complex investment picture where we need to pay more for FA advice. Additionally, robo portfolios are structured in a ‘buy and hold’ manner where market fluctuations should not overly concern an investor as they are structured to benefit over a long run.

What is buy and hold? Buy and hold is a passive investment strategy in which investors buys an investment and holds it for a long period of time. Buy and hold is often easier said than done, as investors do get anxious over times because of market losses. It is important to resist the urge to act in these cases as they generally lead to further losses. However, some robo platforms and staff behind them do send emails to their clients during the volatile markets giving assurances to stay the course.

What is the cost? For robos some charge management fee which is around 25 basis points (0.25%), so if you have $100,000 in your account, you will be charged $250 per year. In addition to that, ETF fees are around 10 basis points (0.10%) which is another $100 on $100,000. In total this is 0.35%, which is much lower in comparison to what dealing with an FA could cost you. If an FA puts you into a mutual fund, the cost to start could generally be 0.75% to 1.25%. Hedge fund fees could be larger. The mutual fund could also have other fees like a front end load or other fees you should ask your FA about.

In conclusion, robos are a clever implementation of affordable investment options for investors to achieve diversification across the market and get your money to work towards your financial goals. Given it’s affordability, one does not get the full service FA, but robos can provide a compelling way to diversify across the market and start your investment journey towards financial goals without the scourge of higher fees.