A Human Advisor’s Perspective on Robo-Advisors
Before business school, I spent four years as an analyst at UBS private wealth management. I did everything from daily trading to performance reviews to investment research for one of the largest teams of advisors on the west coast. As wealth management professionals, my team was constantly worried about disruption from robo-advisors. These sleek technology platforms were supposedly able to advise clients the same way we did at a much lower cost. However, I was never allowed to explore some of these platforms like Robinhood or Wealthfront as federal regulations required me to hold my money at UBS. Now that I’m out of the industry, I decided to take an honest look at these digital trading platforms to see where they offer advantages or disadvantages to traditional financial advisors. In terms of robo-advisors, I will be focusing on Robinhood which is more of a pure trading platform, and Wealthfront which is meant to provide more holistic long-term investing.
Trading
I decided to use Robinhood in my trading analysis as it seems to be one of the most popular online brokerage platforms. Depending on the account level, Robinhood users can freely and instantly trade stocks and ETFs. Users can also enable margin investing with allows them to borrow funds to lever up the risk and hopefully return of their portfolios. With this addition of margin, Robinhood account holders can also buy and sell options contracts. Robinhood also allows for trading before settlement which means users don’t have to wait for funds to actually be delivered before using those funds to purchase other assets. Finally, some Cryptocurrencies can be purchased on Robinhood’s platform which at present is not allowed at traditional brokerage firms like UBS.
However, there are some major drawbacks to using a robo-advisor for trading. Robinhood as an example does not support the purchase of mutual funds or bonds. Additionally, short selling is not allowed on its platform. For a more sophisticated investor, not being able to purchase bonds or mutual funds is a dealbreaker as these products allow for better cash flow and overall hedging. While other platforms like Wealthfront allow for exposure to mutual funds and bonds, investors on these platforms don’t have the freedom to trade individual stocks and options.
With a traditional advisor, clients can purchase and sell most stocks, ETFs, mutual funds, and bonds. There may be some funding and paperwork requirements for margin and options trading, but these are easily resolved. When it comes to trading, a traditional advisor is going to allow for more freedom than most robo-advisors.
Costs
There’s no doubt that where robo-advisors truly separate themselves from traditional advisors is in costs. Robinhood offers completely free trades with no account fee for their regular brokerage accounts. The Robinhood Gold account, which allows for margin capabilities, costs a flat 5 dollars a month which is still a very low amount. Wealthfront uses an advisory fee model and only charges a 0.25% annual fee.
In comparison, fees for traditional advisors can vary widely but will never be as low as those of robo-advisors. In my experience, the minimum commission on brokerage account trades at UBS was $100. For fee-based accounts, we usually charged a little under 1%, but I frequently saw other advisors with fees up to 2–3%.
Market and Portfolio Research
Robo-advisors generally offer minimal investment and portfolio research. You can see how your investments have performed in dollar and percentage terms, and you can track the performance of public stocks and indices. However, this is generally the extent of research and tracking that is provided on a robo-advisors platform. In contrast, as a wealth management analyst, I created reports that showed how each individual portfolio asset performed relative to its own unique benchmark. I would meet with fund managers to learn exactly what assets were held in that fund and hear what those managers were seeing in the markets. I had access to extensive equity research reports on many but not all public companies. I would consistently provide this information in an easily digestible manner for my clients. These are just a few examples of the more extensive research services a traditional investor can provide compared to a digital advisor.
While there are other comparisons to be made between these competitors, I think this gives an adequate overview of the tradeoffs between using a robo-advisor vs a traditional advisor like UBS. Robo-advisors give you simple and easy-to-use trading and investing options at low costs. Traditional advisors will give you better research and review as well as more investing and trading options overall. This will come with a significantly higher cost that may eat into your returns overall. Personally, considering my age, I’m comfortable investing in mostly stocks and ETFs for the foreseeable future. I have no current cash needs and am mostly concerned with generating the highest return possible. For these reasons, I think a low-cost option like Robinhood or Wealthfront is what I will use to invest going forward.
