The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: tod on October 23, 2015, 09:52:17 AM
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I tried a popular robo-advisor this year. While the service has a slick website and some nice features, I always questioned whether it was worth the 0.15% fee. Some have commented that this level of fee falls into the range of "noise". Others, including the service's promotional materials, claim that the advanced features of the service more than make up for the fee. I'm going to make a case that it isn't worth it. To many readers this will be obvious, but it's not obvious to everyone, so I will try to be thorough.
A Tiny Fee
I made a spreadsheet to calculate the effect of a 0.15% fee on a $300,000 portfolio over 30 years. I chose $300,000 because a 4% annual withdrawal is $12,000 per year, or $1,000 per month, which is a nice round number. I assumed a 7% growth rate. The 4% is taken out annually, as well as the "tiny" 0.15% fee. But the fee is then invested at 7% in a separate column.
After 30 years of growth and withdrawal, the original $300,000 account stands at $676,854. The annual advisor fee started out at $464 and ended at $1,046, which does indeed seem like a small slice of the portfolio. The total fees paid during that time come to $21,507 -- an unpleasant number. But if they had been invested at the same 7% rate the account was earning, the fees you paid would have been worth $63,172 in the end. That is 9.33% of the total value of the portfolio from "noise".
The sixty-three thousand dollar question is, are you getting your money's worth?
Fancy portofolio
Obviously, a fancy portofolio of between 6 and 12 funds at very precise allocations can be recreated in a Vanguard account without the 0.15% advisory fee. There are claims that this portfolio is better, well-researched, scientific. I don't know if that's true. Nobody does. Over time everything tends to revert to the mean. There is no guarantee that a fancy robo-portfolio will outperform the Vanguard Total World Stock Index, VTWSX (etf: VT) or a combination of VTSAX (etf: VTI) and VTIAX (etf: VXUS). And there are a thousand intelligent portfolio recommendations out there. The future advantages of the robo-portfolio over a simple portfolio are unknown. But if you think their portfolio is so special, you can recreate it without paying their fees.
Rebalancing
Supposedly automated rebalancing will get you an extra 0.4% per year. But according to this Vanguard study (http://www.vanguard.com/pdf/icrpr.pdf), you can get most of the benefit from rebalancing if you do it either annually or quarterly. Even if you have a fancy portfolio with ten funds or ETFs in it, it will take just a few minutes to type their values into a rebalancing spreadsheet every quarter, and a few minutes more to make the necessary trades. Rebalancing does not require a fancy algorithm. It can be done with a simple spreadsheet.
Cash Drag
A big deal is made out of eliminating cash drag. Since the robo-advisor is so efficient and can assign you fractional ETF shares, there is no cash drag. Cash drag does cost you money. But how much?
If you invest in mutual funds, there is no cash drag.
If you invest in ETFs, cash drag is limited to the price of the lowest-priced ETF in your portfolio, multiplied by each account. As long as you have enough cash to buy a share of the cheapest fund, you can invest. Now the robo-advisor would say that being forced to buy a fund you don't necessarily need more of will throw off your allocation. But unless your account is very small, the portfolio drift this will cause is tiny.
Right now, VWO, a popular component of a robo-portfolio, is trading at $36 and change. The cost of leaving $36 perpetually uninvested over 30 years, at 7%, is $274.04. If you have four accounts (taxable, IRA, Roth IRA, 401k), then it would be $1096.16. Yes, there is a cost to cash drag, but it's a lot less than the advisory fee.
You could invest in mutual funds instead of ETFs and eliminate the problem. Or use ETFs in your taxable account only, for their trading and tax advantages.
Investor Behavior
This means not trying to time the market, staying the course, not freaking out about a correction, and so on. This is totally under your control. You will have to learn good behavior whether you have a robo-advisor or not, because you can wreck your returns in a robo account just as easily as you can in a Vanguard account. The robo-advisor sends you the occasional educational email and tries to nudge you to not change anything and contribute as much as possible. All fine ideas, which you can do on your own.
Tax Loss Harvesting
The robo advisor tax loss harvesting algorithm is impressive. But it won't work in an IRA. So any gains apply only to your taxable account.
The robo advisor is looking for harvesting opportunities every day, which is something most of us don't have time for. But I wonder if the average investor can tax loss harvest once a year, or once a quarter, and get the majority of the benefit without paying the advisory fee.
If the market keeps rising over time, at some point, tax loss harvesting opportunities will disappear. If you keep contributing to the account you may continue to have tax loss harvests. But once you stop contributing and retire, those opportunities will probably disappear.
Some of us may be more interested in tax gain harvesting. If your long term capital gains rate is 0%, it may be more intersting to lock in some of your gains every year. Only you can do this because only you know what your income and tax situation is, so only you know how much gain to realize.
Automatic tax loss harvesting can hurt some of us. If your income is too low, you won't qualify for the health insurance tax credit and would have to go on Medicaid, which I consider unacceptable.
Tax loss harvesting seems to benefit you only in the early stages of investing, and only if you're already rich or are in a high income tax bracket. The percentage gain they claim is, to me, dubious. It will vary greatly with each individual, and in some cases actually be zero. And if you really care, you can do it yourself once a quarter.
I'm not going to do the analysis required to compare automatic TLH with DIY TLH. There may in fact be some small gains with auto TLH, but my gut feeling is that this robo feature is being oversold. The TLH gains they advertise are hard or impossible to quantify, and vary with each individual. Besides, nobody can predict future stock prices. If you move your entire portfolio into a robo account today, there is no guarantee that you will ever see a tax loss harvest on any of it.
Conclusion
Robo advisors are a bad choice for anyone with a brain. And while many have said they're a smart choice for Mr. and Mrs. Average American, I disagree. They can put all their money into a LifeStrategy fund and call it a day. Hell, even a sophisticated investor may choose the one fund approach and save a lot of time and headache.
The reason I wrote all this is that I'm disappointed. I understand the power of technology to make things simple. It's something that I work on every day in my business. The robo-advisors are well designed and they have good features and a lot of potential. But the fact that they charge an asset-based fee is simply insulting. It should cost the same for a computer to manage $1,000,000 as it does to manage $1,000. I would consider paying a fixed fee, like $100 a year, for some of these services. Well, not really, because I prefer to do it myself. But I could see value in paying a reasonable fixed fee for services rendered. But not a percentage of assets under management.
0.15% is not tiny. It has a huge effect on a portfolio over time. Why would you trade 9.33% of your life's savings for a coach who tells you to stay the course?
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Excellent summary, appreciate your work. For me, my greatest concern with the roboadvisors is the idea that I'm locking myself into using them, or at least that method of investing. What if 10 years down the line, I decide that it just isn't working for me...well the cost to switch to something different will be painful in my aftertax accounts.
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Great post! While WiseBanyan.com gets around some of these issues by not charging any extra fees, I still recommend a Vanguard LifeStrategy/TargetRetirement fund for the other reasons you mentioned.
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Excellent summary, appreciate your work. For me, my greatest concern with the roboadvisors is the idea that I'm locking myself into using them, or at least that method of investing. What if 10 years down the line, I decide that it just isn't working for me...well the cost to switch to something different will be painful in my aftertax accounts.
Shouldn't be much of a pain at all. You can make an "in kind" transfer in taxable accounts to and from almost any broker. In the case of Betterment and Wealthfront, the likely choice would be a transfer to Vanguard given that's the majority of the ETFs that the platforms use.
No different than "picking up" your holdings in one account and "dropping" them into another. THe process involves filling out some forms, but no tax implications. In reality, there may be some small selling going on if fractional share transfers are not allowed, but that's a tiny issue. Even .999 shares of 10 funds ends up being a few hundred dollars in sales in order to move a bunch of assets.
To Tod: To post a counterintuitive suggestion, I wish the robo-advisers would INCREASE their fees by 3x or more. With a 0.50%+ fee, maybe people would be pushed into taking control of their investments on their own instead of paying fees. Truth is, 0.15% is a very fair fee compared to almost any other asset adviser out there... especially the people-based ones like Edward Jones, Ameriprise, etc which somehow get away with 1%+ through management fees and fund fees and other crap. I feel truly sorry for those people who don't know enough or have the will to learn the basics of investing and take over themselves.
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0.15% seems fair for the service offered, especially for smaller accounts.
I doubt a large proportion of betterment accounts are upwards of 100k$.
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
Actually, Vanguard charges 0.30% to manage your portfolio for you. And as far as I know, they don't do tax loss harvesting.
The reason I wrote all this is that I'm disappointed. I understand the power of technology to make things simple. It's something that I work on every day in my business. The robo-advisors are well designed and they have good features and a lot of potential. But the fact that they charge an asset-based fee is simply insulting. It should cost the same for a computer to manage $1,000,000 as it does to manage $1,000. I would consider paying a fixed fee, like $100 a year, for some of these services. Well, not really, because I prefer to do it myself. But I could see value in paying a reasonable fixed fee for services rendered. But not a percentage of assets under management.
0.15% is not tiny. It has a huge effect on a portfolio over time. Why would you trade 9.33% of your life's savings for a coach who tells you to stay the course?
I feel like your analysis is very simplistic. You disregard the value of TLH (which allows you to keep more invested early to compound) as well as the probable additional returns from the tilt towards value, small and international vs a market capped Total World fund or U.S. tilted LifeStrategy fund. Not to mention the fact that the majority of Betterment or Wealthfront bonds are tax exempt.
The people investing with Betterment or Wealthfront are not doing so because they "lack a brain". The 0.15% does not necessarily turn into 9.33% You had to use specific (faulty, IMO) assumptions to reach that conclusion.
Bottom line, it's incredibly unlikely that the returns of these two products are going to be identical before fees, so doing some kind of mathematical comparison based on equivalent return minus fee and then extrapolating an 'opportunity cost' of the fee is foolish. My biggest concern with a Betterment or Wealthfront is if they get purchased and drastically change the fee structure or portfolio. Not so much the fees.
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I think the robo-advisor investor would come out ahead of a lifestrategy investor. I compared Vanguard Lifestrategy 80% Stocks / 20% Bonds to the Wealthfront portfolio with 21% bonds on Portfolio Visualizer for the longest stretch available, 1987-2014. Not surprisingly the Wealthfront porfolio would have come out ahead, even after fees. See here. (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond2=14&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&Commodities1=5&annualOperation=0&TotalStockMarket2=48&TotalStockMarket1=35&GlobalBond2=6&initialAmount=300000&EmergingMarket1=15&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&LargeCapValue1=6&startYear=1972&rebalanceType=1&InterTaxExempt1=21&annualPercentage=0.0&EAFE1=18&EAFE2=32) The Monte Carlo simulator agrees. Even then tax loss harvesting may cancel out the additional fees. By the way, you forgot to add the benefit of tax-loss harvesting.
Of course you would be better off doing the same portfolio yourself, but the robo-advisor portfolio is better than many or most options, likely including Vanguard balanced funds. If those are the alternate choice, you would probably do better with a robo-advisor. (Which is mostly because the three-fund portfolio has some of the worst historical returns of any commonly referenced portfolio, both in absolute and risk adjusted terms.)
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
Actually, Vanguard charges 0.30% to manage your portfolio for you. And as far as I know, they don't do tax loss harvesting.
The reason I wrote all this is that I'm disappointed. I understand the power of technology to make things simple. It's something that I work on every day in my business. The robo-advisors are well designed and they have good features and a lot of potential. But the fact that they charge an asset-based fee is simply insulting. It should cost the same for a computer to manage $1,000,000 as it does to manage $1,000. I would consider paying a fixed fee, like $100 a year, for some of these services. Well, not really, because I prefer to do it myself. But I could see value in paying a reasonable fixed fee for services rendered. But not a percentage of assets under management.
0.15% is not tiny. It has a huge effect on a portfolio over time. Why would you trade 9.33% of your life's savings for a coach who tells you to stay the course?
I feel like your analysis is very simplistic. You disregard the value of TLH (which allows you to keep more invested early to compound) as well as the probable additional returns from the tilt towards value, small and international vs a market capped Total World fund or U.S. tilted LifeStrategy fund. Not to mention the fact that the majority of Betterment or Wealthfront bonds are tax exempt.
The people investing with Betterment or Wealthfront are not doing so because they "lack a brain". The 0.15% does not necessarily turn into 9.33% You had to use specific (faulty, IMO) assumptions to reach that conclusion.
Bottom line, it's incredibly unlikely that the returns of these two products are going to be identical before fees, so doing some kind of mathematical comparison based on equivalent return minus fee and then extrapolating an 'opportunity cost' of the fee is foolish. My biggest concern with a Betterment or Wealthfront is if they get purchased and drastically change the fee structure or portfolio. Not so much the fees.
- Vanguard charges 0.30% to give you a real live financial advisor who actually sits down and spends time with to work out a plan. Why would you compare this to robo-advisors?
- Vanguard's robo-advisor is called LifeStrategy and TargetRetirement. They've been around long before the term "robo-advisor" was coined, and do not charge an extra fee.
- WiseBanyan, another robo-advisor, does not charge an extra fee, and offers Tax Loss Harvesting.
- Paying for Tax Loss Harvesting can result in an overall loss depending on your personal circumstances. Tax Loss Harvesting in general can result in higher taxes when all is said and done. Most people don't do the math on this. It is by no means a guaranteed winner.
- If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
- If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
- Considering the above two points, the vast majority (about 99%) of Americans are better off without municipal bonds in their portfolio. Then why are municipal bonds forced upon you in places like Betterment and Wealthfront? My guess is sounds better in their marketing material (a big part of what they're spending your 0.15% on)
- Vanguard's robo-advisor and WiseBanyan both have a 7% tilt towards the US to reduce currency risk. Betterment seems to have a 7% tilt towards international, along with a tilt towards value, with the hope of seeing more returns. Wealthfront splits it down the middle and goes 50% US and 50% international, which is usually right around the market weight. There is no way to know which portfolio will outperform in the future, but they all index, so you won't see any drastic differences. Attempting to judge the various portfolios based on an ability to tell the future is a guessing game, the only thing we know for sure is cost. In terms of cost, WiseBanyan is the best, followed closely by Vanguard, then far behind is Betterment, then Wealthfront.
The lowest-cost option WiseBanyan should be the default choice. There should be a good reason to pay more for a more expensive offering. If you want a value/international tilt, pay more for Betterment. If you want a market weight portfolio, pay more for Wealthfront (though be warned, some bewildering picks like Dividend Stocks and Natural Resources will be forced on you). If you want to invest with the only company in the list who generates just enough profit to cover its costs, and with no outside owners (they are owned by the people like you who buy the funds) truly operates with your best interests in mind, choose Vanguard:
(https://i.sli.mg/KhvPl2.png)
WiseBanyan seems to be going down the path of Personal Capital, where they provide a free service, but if you want something more hands-on, they'll charge you fee (probably 0.5-1%) to take care of everything for you. Pretty awesome if you ask me, but unproven. It's too soon to know if this will be a valid long-term business model.
In reality, no matter which of these you pick, your money will be with Vanguard. The other options are little more than a website overlay on top of the same Vanguard funds. The main (only?) robo-advisor which doesn't use Vanguard funds comes from Charles Schwab, but due to the large allocation to cash (earning 0% interest) that Schwab puts you in, I couldn't think of a compelling reason to pick them.
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I think the robo-advisor investor would come out ahead of a lifestrategy investor. I compared Vanguard Lifestrategy 80% Stocks / 20% Bonds to the Wealthfront portfolio with 21% bonds on Portfolio Visualizer for the longest stretch available, 1987-2014. Not surprisingly the Wealthfront porfolio would have come out ahead, even after fees. See here. (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond2=14&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&Commodities1=5&annualOperation=0&TotalStockMarket2=48&TotalStockMarket1=35&GlobalBond2=6&initialAmount=300000&EmergingMarket1=15&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&LargeCapValue1=6&startYear=1972&rebalanceType=1&InterTaxExempt1=21&annualPercentage=0.0&EAFE1=18&EAFE2=32) The Monte Carlo simulator agrees. Even then tax loss harvesting may cancel out the additional fees. By the way, you forgot to add the benefit of tax-loss harvesting.
Of course you would be better off doing the same portfolio yourself, but the robo-advisor portfolio is better than many or most options, likely including Vanguard balanced funds. If those are the alternate choice, you would probably do better with a robo-advisor. (Which is mostly because the three-fund portfolio has some of the worst historical returns of any commonly referenced portfolio, both in absolute and risk adjusted terms.)
"Wealthfront's chosen allocation (which launched just a few years ago) performed better over the previous ~30 years, therefore it is the better portfolio." Raven15, you may be too new to investing to recognize how flawed this line of thinking is.
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Vanguard charges 0.30% to give you a real live financial advisor who actually sits down and spends time with to work out a plan. Why would you compare this to robo-advisors?
Nobody "sits down with you". You maybe get a call phone periodically and they invest you in the equivalent of a LifeStrategy fund. I'd compare it to a robo-advisor because that is what everyone else does. e.g. https://investorjunkie.com/41642/robo-advisor-comparison/
If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
What analysis did you use to determine this? If it is tax rates, then you would cut those numbers in half for a single person which is a lot more reasonable.
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Vanguard charges 0.30% to give you a real live financial advisor who actually sits down and spends time with to work out a plan. Why would you compare this to robo-advisors?
Nobody "sits down with you". You maybe get a call phone periodically and they invest you in the equivalent of a LifeStrategy fund. I'd compare it to a robo-advisor because that is what everyone else does. e.g. https://investorjunkie.com/41642/robo-advisor-comparison/
No point debating it. If you can't see how the addition of a human financial planner who listens to what you want and develops a personalized plan based on your unique financial situation, while providing investment advice, financial planning...etc, makes it different than a standard robo-advisor, nothing I say will convince you otherwise:
https://investor.vanguard.com/advice/personal-advisor
In any case, LifeStrategy and TargetRetirement exist, so let's not spread any misinformation by saying Vanguard charges 0.30% for their Betterment/Wealthfront/WiseBanyan/CharlesSchwab equivalent offering.
If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
What analysis did you use to determine this? If it is tax rates, then you would cut those numbers in half for a single person which is a lot more reasonable.
Since you've already given Betterment your money, and you're claiming that municipal bonds are better, you must've done the math already right? Show us your numbers. If they are different than mine, we can discuss where one of us went wrong.
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I think the robo-advisor investor would come out ahead of a lifestrategy investor. I compared Vanguard Lifestrategy 80% Stocks / 20% Bonds to the Wealthfront portfolio with 21% bonds on Portfolio Visualizer for the longest stretch available, 1987-2014. Not surprisingly the Wealthfront porfolio would have come out ahead, even after fees. See here. (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond2=14&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&Commodities1=5&annualOperation=0&TotalStockMarket2=48&TotalStockMarket1=35&GlobalBond2=6&initialAmount=300000&EmergingMarket1=15&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&LargeCapValue1=6&startYear=1972&rebalanceType=1&InterTaxExempt1=21&annualPercentage=0.0&EAFE1=18&EAFE2=32) The Monte Carlo simulator agrees. Even then tax loss harvesting may cancel out the additional fees. By the way, you forgot to add the benefit of tax-loss harvesting.
Of course you would be better off doing the same portfolio yourself, but the robo-advisor portfolio is better than many or most options, likely including Vanguard balanced funds. If those are the alternate choice, you would probably do better with a robo-advisor. (Which is mostly because the three-fund portfolio has some of the worst historical returns of any commonly referenced portfolio, both in absolute and risk adjusted terms.)
"Wealthfront's chosen allocation (which launched just a few years ago) performed better over the previous ~30 years, therefore it is the better portfolio." Raven15, you may be too new to investing to recognize how flawed this line of thinking is.
I observe most of the performance difference seems to be a result of overweighting emerging markets. I also observe emerging markets still seem to be risky. Interest Compound, do your long years of investing experience give you a reason to think the heretofore relationship between risk and reward will cease to exist for the next 30 years?
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
I don't believe wise banyan offers TLH at this time. Big difference.
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
Actually, Vanguard charges 0.30% to manage your portfolio for you. And as far as I know, they don't do tax loss harvesting.
The reason I wrote all this is that I'm disappointed. I understand the power of technology to make things simple. It's something that I work on every day in my business. The robo-advisors are well designed and they have good features and a lot of potential. But the fact that they charge an asset-based fee is simply insulting. It should cost the same for a computer to manage $1,000,000 as it does to manage $1,000. I would consider paying a fixed fee, like $100 a year, for some of these services. Well, not really, because I prefer to do it myself. But I could see value in paying a reasonable fixed fee for services rendered. But not a percentage of assets under management.
0.15% is not tiny. It has a huge effect on a portfolio over time. Why would you trade 9.33% of your life's savings for a coach who tells you to stay the course?
I feel like your analysis is very simplistic. You disregard the value of TLH (which allows you to keep more invested early to compound) as well as the probable additional returns from the tilt towards value, small and international vs a market capped Total World fund or U.S. tilted LifeStrategy fund. Not to mention the fact that the majority of Betterment or Wealthfront bonds are tax exempt.
The people investing with Betterment or Wealthfront are not doing so because they "lack a brain". The 0.15% does not necessarily turn into 9.33% You had to use specific (faulty, IMO) assumptions to reach that conclusion.
Bottom line, it's incredibly unlikely that the returns of these two products are going to be identical before fees, so doing some kind of mathematical comparison based on equivalent return minus fee and then extrapolating an 'opportunity cost' of the fee is foolish. My biggest concern with a Betterment or Wealthfront is if they get purchased and drastically change the fee structure or portfolio. Not so much the fees.
- Vanguard charges 0.30% to give you a real live financial advisor who actually sits down and spends time with to work out a plan. Why would you compare this to robo-advisors?
- Vanguard's robo-advisor is called LifeStrategy and TargetRetirement. They've been around long before the term "robo-advisor" was coined, and do not charge an extra fee.
- WiseBanyan, another robo-advisor, does not charge an extra fee, and offers Tax Loss Harvesting.
- Paying for Tax Loss Harvesting can result in an overall loss depending on your personal circumstances. Tax Loss Harvesting in general can result in higher taxes when all is said and done. Most people don't do the math on this. It is by no means a guaranteed winner.
- If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
- If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
- Considering the above two points, the vast majority (about 99%) of Americans are better off without municipal bonds in their portfolio. Then why are municipal bonds forced upon you in places like Betterment and Wealthfront? My guess is sounds better in their marketing material (a big part of what they're spending your 0.15% on)
- Vanguard's robo-advisor and WiseBanyan both have a 7% tilt towards the US to reduce currency risk. Betterment seems to have a 7% tilt towards international, along with a tilt towards value, with the hope of seeing more returns. Wealthfront splits it down the middle and goes 50% US and 50% international, which is usually right around the market weight. There is no way to know which portfolio will outperform in the future, but they all index, so you won't see any drastic differences. Attempting to judge the various portfolios based on an ability to tell the future is a guessing game, the only thing we know for sure is cost. In terms of cost, WiseBanyan is the best, followed closely by Vanguard, then far behind is Betterment, then Wealthfront.
The lowest-cost option WiseBanyan should be the default choice. There should be a good reason to pay more for a more expensive offering. If you want a value/international tilt, pay more for Betterment. If you want a market weight portfolio, pay more for Wealthfront (though be warned, some bewildering picks like Dividend Stocks and Natural Resources will be forced on you). If you want to invest with the only company in the list who generates just enough profit to cover its costs, and with no outside owners (they are owned by the people like you who buy the funds) truly operates with your best interests in mind, choose Vanguard:
(http://4.1m.yt/50GURPsH4.png)
WiseBanyan seems to be going down the path of Personal Capital, where they provide a free service, but if you want something more hands-on, they'll charge you fee (probably 0.5-1%) to take care of everything for you. Pretty awesome if you ask me, but unproven. It's too soon to know if this will be a valid long-term business model.
In reality, no matter which of these you pick, your money will be with Vanguard. The other options are little more than a website overlay on top of the same Vanguard funds. The main (only?) robo-advisor which doesn't use Vanguard funds comes from Charles Schwab, but due to the large allocation to cash (earning 0% interest) that Schwab puts you in, I couldn't think of a compelling reason to pick them.
The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
You can have inefficiently run not for profit enterprises that offer less value than efficiently run for profit enterprises.
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I tried a popular robo-advisor this year. While the service has a slick website and some nice features, I always questioned whether it was worth the 0.15% fee. Some have commented that this level of fee falls into the range of "noise". Others, including the service's promotional materials, claim that the advanced features of the service more than make up for the fee. I'm going to make a case that it isn't worth it. To many readers this will be obvious, but it's not obvious to everyone, so I will try to be thorough.
A Tiny Fee
I made a spreadsheet to calculate the effect of a 0.15% fee on a $300,000 portfolio over 30 years. I chose $300,000 because a 4% annual withdrawal is $12,000 per year, or $1,000 per month, which is a nice round number. I assumed a 7% growth rate. The 4% is taken out annually, as well as the "tiny" 0.15% fee. But the fee is then invested at 7% in a separate column.
After 30 years of growth and withdrawal, the original $300,000 account stands at $676,854. The annual advisor fee started out at $464 and ended at $1,046, which does indeed seem like a small slice of the portfolio. The total fees paid during that time come to $21,507 -- an unpleasant number. But if they had been invested at the same 7% rate the account was earning, the fees you paid would have been worth $63,172 in the end. That is 9.33% of the total value of the portfolio from "noise".
The sixty-three thousand dollar question is, are you getting your money's worth?
Fancy portofolio
Obviously, a fancy portofolio of between 6 and 12 funds at very precise allocations can be recreated in a Vanguard account without the 0.15% advisory fee. There are claims that this portfolio is better, well-researched, scientific. I don't know if that's true. Nobody does. Over time everything tends to revert to the mean. There is no guarantee that a fancy robo-portfolio will outperform the Vanguard Total World Stock Index, VTWSX (etf: VT) or a combination of VTSAX (etf: VTI) and VTIAX (etf: VXUS). And there are a thousand intelligent portfolio recommendations out there. The future advantages of the robo-portfolio over a simple portfolio are unknown. But if you think their portfolio is so special, you can recreate it without paying their fees.
Rebalancing
Supposedly automated rebalancing will get you an extra 0.4% per year. But according to this Vanguard study (http://www.vanguard.com/pdf/icrpr.pdf), you can get most of the benefit from rebalancing if you do it either annually or quarterly. Even if you have a fancy portfolio with ten funds or ETFs in it, it will take just a few minutes to type their values into a rebalancing spreadsheet every quarter, and a few minutes more to make the necessary trades. Rebalancing does not require a fancy algorithm. It can be done with a simple spreadsheet.
Cash Drag
A big deal is made out of eliminating cash drag. Since the robo-advisor is so efficient and can assign you fractional ETF shares, there is no cash drag. Cash drag does cost you money. But how much?
If you invest in mutual funds, there is no cash drag.
If you invest in ETFs, cash drag is limited to the price of the lowest-priced ETF in your portfolio, multiplied by each account. As long as you have enough cash to buy a share of the cheapest fund, you can invest. Now the robo-advisor would say that being forced to buy a fund you don't necessarily need more of will throw off your allocation. But unless your account is very small, the portfolio drift this will cause is tiny.
Right now, VWO, a popular component of a robo-portfolio, is trading at $36 and change. The cost of leaving $36 perpetually uninvested over 30 years, at 7%, is $274.04. If you have four accounts (taxable, IRA, Roth IRA, 401k), then it would be $1096.16. Yes, there is a cost to cash drag, but it's a lot less than the advisory fee.
You could invest in mutual funds instead of ETFs and eliminate the problem. Or use ETFs in your taxable account only, for their trading and tax advantages.
Investor Behavior
This means not trying to time the market, staying the course, not freaking out about a correction, and so on. This is totally under your control. You will have to learn good behavior whether you have a robo-advisor or not, because you can wreck your returns in a robo account just as easily as you can in a Vanguard account. The robo-advisor sends you the occasional educational email and tries to nudge you to not change anything and contribute as much as possible. All fine ideas, which you can do on your own.
Tax Loss Harvesting
The robo advisor tax loss harvesting algorithm is impressive. But it won't work in an IRA. So any gains apply only to your taxable account.
The robo advisor is looking for harvesting opportunities every day, which is something most of us don't have time for. But I wonder if the average investor can tax loss harvest once a year, or once a quarter, and get the majority of the benefit without paying the advisory fee.
If the market keeps rising over time, at some point, tax loss harvesting opportunities will disappear. If you keep contributing to the account you may continue to have tax loss harvests. But once you stop contributing and retire, those opportunities will probably disappear.
Some of us may be more interested in tax gain harvesting. If your long term capital gains rate is 0%, it may be more intersting to lock in some of your gains every year. Only you can do this because only you know what your income and tax situation is, so only you know how much gain to realize.
Automatic tax loss harvesting can hurt some of us. If your income is too low, you won't qualify for the health insurance tax credit and would have to go on Medicaid, which I consider unacceptable.
Tax loss harvesting seems to benefit you only in the early stages of investing, and only if you're already rich or are in a high income tax bracket. The percentage gain they claim is, to me, dubious. It will vary greatly with each individual, and in some cases actually be zero. And if you really care, you can do it yourself once a quarter.
I'm not going to do the analysis required to compare automatic TLH with DIY TLH. There may in fact be some small gains with auto TLH, but my gut feeling is that this robo feature is being oversold. The TLH gains they advertise are hard or impossible to quantify, and vary with each individual. Besides, nobody can predict future stock prices. If you move your entire portfolio into a robo account today, there is no guarantee that you will ever see a tax loss harvest on any of it.
Conclusion
Robo advisors are a bad choice for anyone with a brain. And while many have said they're a smart choice for Mr. and Mrs. Average American, I disagree. They can put all their money into a LifeStrategy fund and call it a day. Hell, even a sophisticated investor may choose the one fund approach and save a lot of time and headache.
The reason I wrote all this is that I'm disappointed. I understand the power of technology to make things simple. It's something that I work on every day in my business. The robo-advisors are well designed and they have good features and a lot of potential. But the fact that they charge an asset-based fee is simply insulting. It should cost the same for a computer to manage $1,000,000 as it does to manage $1,000. I would consider paying a fixed fee, like $100 a year, for some of these services. Well, not really, because I prefer to do it myself. But I could see value in paying a reasonable fixed fee for services rendered. But not a percentage of assets under management.
0.15% is not tiny. It has a huge effect on a portfolio over time. Why would you trade 9.33% of your life's savings for a coach who tells you to stay the course?
I agree with much of your analysis and appreciate the time you put in.
That being said, I personally use Betterment for my taxable investment account and I'm fairly certain that I have a brain.
For me I saved 0.95% of my portfolio value last year over Vanguard target date funds after TLH, I'm on track this year for the same despite very little new money invested. So surely you would agree that if compounding 0.15% is valuable, then compounding 0.95 % is far more valuable.
After that, it's all about individual specifics (investor tax bracket now and in retirement) and preferences (Do you believe in the academic evidence of the presence of a value and size effect? Do you favor market cap weighted international diversification, or more of a home field bias portfolio? Do you favor a more tax efficient bond allocation for taxable accounts with the inclusion of Muni's?)
Do you value having your portfolio automatically rebalanced so that you risk profile remains unchanged regardless of when the next bear market hits? Are you less likely to tinker if you can literally set it and forget it.
It's actually a complex question, and there is truly no one right answer.
Your conclusion would have been far more accurate had you been a little less sweeping in your pronouncement, had you simply concluded that Betterment is not the right platform for you.
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I think the robo-advisor investor would come out ahead of a lifestrategy investor. I compared Vanguard Lifestrategy 80% Stocks / 20% Bonds to the Wealthfront portfolio with 21% bonds on Portfolio Visualizer for the longest stretch available, 1987-2014. Not surprisingly the Wealthfront porfolio would have come out ahead, even after fees. See here. (https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond2=14&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&Commodities1=5&annualOperation=0&TotalStockMarket2=48&TotalStockMarket1=35&GlobalBond2=6&initialAmount=300000&EmergingMarket1=15&endYear=2014&mode=2&inflationAdjusted=true&annualAdjustment=0&LargeCapValue1=6&startYear=1972&rebalanceType=1&InterTaxExempt1=21&annualPercentage=0.0&EAFE1=18&EAFE2=32) The Monte Carlo simulator agrees. Even then tax loss harvesting may cancel out the additional fees. By the way, you forgot to add the benefit of tax-loss harvesting.
Of course you would be better off doing the same portfolio yourself, but the robo-advisor portfolio is better than many or most options, likely including Vanguard balanced funds. If those are the alternate choice, you would probably do better with a robo-advisor. (Which is mostly because the three-fund portfolio has some of the worst historical returns of any commonly referenced portfolio, both in absolute and risk adjusted terms.)
"Wealthfront's chosen allocation (which launched just a few years ago) performed better over the previous ~30 years, therefore it is the better portfolio." Raven15, you may be too new to investing to recognize how flawed this line of thinking is.
I observe most of the performance difference seems to be a result of overweighting emerging markets. I also observe emerging markets still seem to be risky. Interest Compound, do your long years of investing experience give you a reason to think the heretofore relationship between risk and reward will cease to exist for the next 30 years?
It seems your changing your argument from the original post. Is it now your position that the riskier portfolio will always come out ahead? Please clarify your position.
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Either you sell and incur capital-gains taxes, or you move in-kind and have to manually manage their 12-24 ETF portfolio for the rest of your life. Either way, it's a big "cost".
0.15% might seem fair when comparing it to 1-2%. But when you consider the competition (Vanguard/WiseBanyan) is offering fully automatic "Robo" portfolios for 0.00% added cost, paying anything is just silly. The fact that so many people are doing it, really just speaks to the size of their marketing budget (...which you're paying for with that 0.15% fee).
I don't believe wise banyan offers TLH at this time. Big difference.
Correct. It seems they are releasing this feature next month, but since they will charge for it, it will likely go down the path of Betterment/Wealthfront and not be able to overcome the fee.
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The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
Vanguard's cheapest robo-advisor has a 0.14% ER. Betterment's cheapest option has a 0.31% ER.
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For me I saved 0.95% of my portfolio value last year over Vanguard target date funds after TLH, I'm on track this year for the same despite very little new money invested. So surely you would agree that if compounding 0.15% is valuable, then compounding 0.95 % is far more valuable.
When looking at all available historical data, tax loss harvesting has never been able to overcome a 0.15% ER over the long-term.
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Hi Fellow Mustachians,
We did a comparison of the costs of popular robo-advisors on our web site Investor Junkie. We did it a various deposit amounts to get an idea of what the actual costs might be. It includes not only annual fees BUT also ETF fees.
https://investorjunkie.com/42668/true-costs-robo-advisors/
I compared the costs of these robo-advisors:
- Betterment
- Charles Schwab
- Vanguard
- Wealthfront
I did not include WiseBaynan because of their unknown revenue model and size (only $35M AUM)
Charles Schwab came out the cheapest but with an asterisk it because of the 6-30% cash drag all accounts have.
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For me I saved 0.95% of my portfolio value last year over Vanguard target date funds after TLH, I'm on track this year for the same despite very little new money invested. So surely you would agree that if compounding 0.15% is valuable, then compounding 0.95 % is far more valuable.
When looking at all available historical data, tax loss harvesting has never been able to overcome a 0.15% ER over the long-term.
Wow, you've reviewed all historical data on TLH? That hardly seems like a credible claim.
Please share all of the data here, but do try not to crash the servers.
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The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
Vanguard's cheapest robo-advisor has a 0.14% ER. Betterment's cheapest option has a 0.31% ER.
According to this source, Vanguard charges 0.3% for their roboadvisory plus the 0.5-0.19% ER for the underlying assets. Oh and they also have a $50K account minimum.
http://www.investmentnews.com/article/20150505/FREE/150509967/vanguard-officially-launches-its-robo-adviser-drops-minimum
Please defend your claim.
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For me I saved 0.95% of my portfolio value last year over Vanguard target date funds after TLH, I'm on track this year for the same despite very little new money invested. So surely you would agree that if compounding 0.15% is valuable, then compounding 0.95 % is far more valuable.
When looking at all available historical data, tax loss harvesting has never been able to overcome a 0.15% ER over the long-term.
Wow, you've reviewed all historical data on TLH? That hardly seems like a credible claim.
Please share all of the data here, but do try not to crash the servers.
It's simple logic, and has been posted in many Betterment threads. Also, please note rule #1 on the forum:
The overriding principle here on this site: Be a human being and treat others respectfully.
That includes, but is not limited to:
1. Don't be a jerk.
http://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/
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The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
Vanguard's cheapest robo-advisor has a 0.14% ER. Betterment's cheapest option has a 0.31% ER.
According to this source, Vanguard charges 0.3% for their roboadvisory plus the 0.5-0.19% ER for the underlying assets. Oh and they also have a $50K account minimum.
http://www.investmentnews.com/article/20150505/FREE/150509967/vanguard-officially-launches-its-robo-adviser-drops-minimum
Please defend your claim.
It has already been posted in this thread.
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For me I saved 0.95% of my portfolio value last year over Vanguard target date funds after TLH, I'm on track this year for the same despite very little new money invested. So surely you would agree that if compounding 0.15% is valuable, then compounding 0.95 % is far more valuable.
When looking at all available historical data, tax loss harvesting has never been able to overcome a 0.15% ER over the long-term.
Wow, you've reviewed all historical data on TLH? That hardly seems like a credible claim.
Please share all of the data here, but do try not to crash the servers.
It's simple logic, and has been posted in many Betterment threads. Also, please note rule #1 on the forum:
The overriding principle here on this site: Be a human being and treat others respectfully.
That includes, but is not limited to:
1. Don't be a jerk.
http://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/
You made a specific claim:
"When looking at all available historical data, tax loss harvesting has never been able to overcome a 0.15% ER over the long-term."
Your claim is clearly false, since you have not looked back at all available historical data. If pointing out that you are making false claims is "being a jerk," then one solution would be for you to stop making unsupportable claims.
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The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
Vanguard's cheapest robo-advisor has a 0.14% ER. Betterment's cheapest option has a 0.31% ER.
According to this source, Vanguard charges 0.3% for their roboadvisory plus the 0.5-0.19% ER for the underlying assets. Oh and they also have a $50K account minimum.
http://www.investmentnews.com/article/20150505/FREE/150509967/vanguard-officially-launches-its-robo-adviser-drops-minimum
Please defend your claim.
It has already been posted in this thread.
No it hasn't.
Your link reports the exact same 0.3% advisory fee which is better than the industry average 0.99% fee.
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Life strategy is not a robo advisor. It's a fund of funds. They are different. You should know that.
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The problem with this analysis is that Vanguard offers it's own robo-advisory platform and it charges more than 0.15!
Vanguard's cheapest robo-advisor has a 0.14% ER. Betterment's cheapest option has a 0.31% ER.
According to this source, Vanguard charges 0.3% for their roboadvisory plus the 0.5-0.19% ER for the underlying assets. Oh and they also have a $50K account minimum.
http://www.investmentnews.com/article/20150505/FREE/150509967/vanguard-officially-launches-its-robo-adviser-drops-minimum
Please defend your claim.
It has already been posted in this thread.
No it hasn't.
Your link reports the exact same 0.3% advisory fee which is "better than the industry average 0.99% fee."
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
What you don't seem to get is that there's not much human input at all for Vanguard's VPAS. They literally run an algorithm and recommend the same 4 funds - for everybody regardless of their situation.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
This is just silly.
No one at vanguard claims that their lifestrategy/target retirement funds are robo-advisories. No third party who reviews Roboadvisories includes these products in their reviews, though they do include "personal advisory service" in such views.
You can't TLH individual funds within these products, and they wont do it for you. These are funds of funds, which are just a completely different category from roboadvisors.
So if you like the offerings that Betterment or the other advisories offer to their clients, the only way to access them at vanguard is to sign up for PAS.
I don't see how you can take your own argument seriously, it's just completely lacks credibility.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
What you don't seem to get is that there's not much human input at all for Vanguard's VPAS. They literally run an algorithm and recommend the same 4 funds - for everybody regardless of their situation.
Those 4 funds are all anybody needs, in any situation. If you're expecting market-timing advice I agree you won't get it.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
What you don't seem to get is that there's not much human input at all for Vanguard's VPAS. They literally run an algorithm and recommend the same 4 funds - for everybody regardless of their situation.
Those 4 funds are all anybody needs, in any situation. If you're expecting market-timing advice I agree you won't get it.
Who said anything about market timing?
That's a total non sequitur since all of the investment options being discussed here are passive investment vehicles.
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So if you like the offerings that Betterment or the other advisories offer to their clients, the only way to access them at vanguard is to sign up for PAS.
Incorrect. The only offerings stated in this thread which aren't offered by Vanguard's LifeStrategy/TargetRetirement robo-advisors, is Tax Loss Harvesting. Considering that all the companies who offer TLH do so at a relative loss since it doesn't overcome their fee, it's a non-issue.
Vanguard's robo-advisors:
- Are more diversified, in terms of owning a much greater number of unique stocks/bonds.
- Don't require advanced knowledge of the market to invest (anybody can do it with a few button pushes)
- Have less fees, by at least about half.
- Are professionally managed automatically.
- Automatically rebalance.
- Gradually get less risky as you get age (TargetRetirement).
- Outperform a manual portfolio with Vanguard's Admiral shares (last I checked, despite having a slightly higher overall ER).
- Keep you from tinkering with your portfolio.
- Let you easily schedule automatic contributions while keeping your allocation balanced ($500 a paycheck automatically invested for example).
- Let you easily schedule automatic distributions while keeping your allocation balanced ($4000 a month automatically deposited to your bank account for example).
- Let you "Set it and forget it". You can literally login once, schedule automatic contributions, and come back 30 years later knowing everything has been taken care of for you.
- Reinvest dividends are automatically.
- Are more tax efficient than most other robo-advisors for 99% of Americans due to not holding municipal bonds.
- Allow you to easily invest money separately based on goals. Short-term money vs long-term money vs retirement money, for example.
There are probably a few more I'm forgetting.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
What you don't seem to get is that there's not much human input at all for Vanguard's VPAS. They literally run an algorithm and recommend the same 4 funds - for everybody regardless of their situation.
Those 4 funds are all anybody needs, in any situation. If you're expecting market-timing advice I agree you won't get it.
Who said anything about market timing?
That's a total non sequitur since all of the investment options being discussed here are passive investment vehicles.
Do you disagree with my main point, that these 4 funds are all anybody needs?
Total Stock Index Fund - 3809 stocks across the US
Total Bond Index Fund - 7701 bonds across the US
Total International Stock Index Fund - 6018 stocks across the world
Total International Bond Index Fund - 3903 bonds across the world
A total of 21431 unique stock/bonds across the world?
Milesdividendmd, you have a tendency to derail threads. Please try to keep your posts relevant so the newbies here who are reading this for the first time can get the information they need, without having to read page after page of back and forth nit-picking. While I admit your posts helped me tremendously, as they led me to close my Betterment account, it would be much more helpful to the community if you were less argumentative/combative, and instead focused on what would be best for the community.
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Roboadvisories are
Not professionally managed (they are managed by algorithms hence the name)
Only change allocation based on investor choice.
Use dividend reinvestment to buy fractional shares of OTHER securities to keep allocation constant.
give you the precise stock/bond split that you want.
Allow you to tax loss harvest individual securities (without doing a thing)
So you can argue that life strategy/tdr funds are better if you like, but what they are clearly not is Roboadvisories.
2 different things. Not a hard concept for most.
Oh and the evidence is pretty clear that TLH can provide gains after fees.
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Roboadvisories are
Not professionally managed (they are managed by algorithms hence the name)
Only change allocation based on investor choice.
Use dividend reinvestment to buy fractional shares of OTHER securities to keep allocation constant.
give you the precise stock/bond split that you want.
Allow you to tax loss harvest individual securities (without doing a thing)
So you can argue that life strategy/tdr funds are better if you like, but what they are clearly not is Roboadvisories.
Great, now that we've both hashed out our opinion of what constitutes a "robo-advisor", the thread may continue on, and possibly help those who are new to the forum decide where to put their money. :)
2 different things. Not a hard concept for most.
Please try to abide by the forum rules. Insulting the intelligence of others is not conducive to a welcoming community. Forum rules:
----------------------------------
The overriding principle here on this site: Be a human being and treat others respectfully.
That includes, but is not limited to:
1. Don't be a jerk.
2. Attack an argument, not a person.
http://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/
----------------------------------
Oh and the evidence is pretty clear that TLH can provide gains after fees.
Many posters have presented clear evidence that it doesn't over the long-term. It's just math, but no use continuing to go in circles over this. The information is out there, the newbies can decide for themselves.
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Robo-advisor is commonly defined as: "An online wealth management service that provides automated, algorithm-based portfolio management without the use human financial planners."
If you believe this fits Vanguard's Personal Advisor service, which includes a human financial planner:
https://www.youtube.com/watch?v=oxOLOo-zHyQ
But not Vanguard's LifeStrategy/TargetRetirement offerings, which are automated portfolios, there's nothing I can say that will convince you.
What you don't seem to get is that there's not much human input at all for Vanguard's VPAS. They literally run an algorithm and recommend the same 4 funds - for everybody regardless of their situation.
Those 4 funds are all anybody needs, in any situation. If you're expecting market-timing advice I agree you won't get it.
Who said anything about market timing?
That's a total non sequitur since all of the investment options being discussed here are passive investment vehicles.
Do you disagree with my main point, that these 4 funds are all anybody needs?
Total Stock Index Fund - 3809 stocks across the US
Total Bond Index Fund - 7701 bonds across the US
Total International Stock Index Fund - 6018 stocks across the world
Total International Bond Index Fund - 3903 bonds across the world
A total of 21431 unique stock/bonds across the world?
Milesdividendmd, you have a tendency to derail threads. Please try to keep your posts relevant so the newbies here who are reading this for the first time can get the information they need, without having to read page after page of back and forth nit-picking. While I admit your posts helped me tremendously, as they led me to close my Betterment account, it would be much more helpful to the community if you were less argumentative/combative, and instead focused on what would be best for the community.
Yes I do deny that those 4 funds are all that anyone needs.
I would never invest in those funds because for my taste they are
More expensive then their underlying funds.
Tax inefficient for taxable accounts.
Under diversified internationally in terms of equities.
Tax inefficient in their bond bucket
More expensive than betterment after TLH (by a lot for me)
Completely lacking in any exposure to the value or size premiums.
Underweight EM for my taste.
And instead of lecturing me about my tendency to "derail threads," perhaps you should work on your own tendency to confidently proclaim "facts" that are quite demonstrably untrue. You know, little things like
Target date funds are roboadvisors.
TLH can not provide value after fees.
TLH can not provide alpha for "long periods."
That tax loss harvesting has never overcome a 0.15% fee when looking at "all historical data."
Confidently proclaiming things that are obviously untrue, makes threads confusing for all involved.
It's better to just forcefully defend your opinion with actual facts.
Plus, If you simply stopped making demonstrably false statements, then I would be relieved of my duty to point out how transparently and provably false your statements are.
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- If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
- If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
- Considering the above two points, the vast majority (about 99%) of Americans are better off without municipal bonds in their portfolio. Then why are municipal bonds forced upon you in places like Betterment and Wealthfront? My guess is sounds better in their marketing material (a big part of what they're spending your 0.15% on)
What analysis did you use to determine this? If it is tax rates, then you would cut those numbers in half for a single person which is a lot more reasonable.
When to use Municipal (tax-exempt) bonds (http://forum.mrmoneymustache.com/investor-alley/when-to-use-municipal-(tax-exempt)-bonds/)
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- If your household income (for married couples) is less than $280,000 a year, municipal bonds (like Betterment forces you to hold if you want bonds) provide no benefit.
- If your household income (for married couples) is less than $127,450 a year, municipal bonds hurt your portfolio. You're better off with normal bonds.
- Considering the above two points, the vast majority (about 99%) of Americans are better off without municipal bonds in their portfolio. Then why are municipal bonds forced upon you in places like Betterment and Wealthfront? My guess is sounds better in their marketing material (a big part of what they're spending your 0.15% on)
What analysis did you use to determine this? If it is tax rates, then you would cut those numbers in half for a single person which is a lot more reasonable.
When to use Municipal (tax-exempt) bonds (http://forum.mrmoneymustache.com/investor-alley/when-to-use-municipal-(tax-exempt)-bonds/)
Confirms my original thought that it may be better to manage bonds separately if you're going to go the betterment route. Especially for smaller investors who can utilize risk free CDs, but the lower yield may indeed be worth the automation / less effort. I never thought it made sense to pay the fee on the bond portion because it eats up so much of the yield.
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
(http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20151031_FNC334.png)
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
Definitely agree. Even if I was ok with the fee (which I think is silly for what they do, but not too bad) and the dubious utility of TLH over time, the fact that these are money-loosing startups pushing hard on marketing to gain exponential growth would keep me from putty money there. Dealing with those 20 ETF on my own later sounds like a huge pain. And could be seen as a tactic to keep customers: "see how difficult this is, you can't leave us..."
Another choice quote [emphasis mine]:
But being very cheap means Betterment and Wealthfront need lots of assets to turn a profit. Their AUM of roughly $2.9 billion each, accumulated largely in the past two years, delivers revenues of $7m or so a year. That is not enough to sustain around 100 staff each as well as hefty marketing budgets. Total costs are likely to be $40m-50m a year, according to one fintech grandee (neither firm discloses the data).
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
Definitely agree. Even if I was ok with the fee (which I think is silly for what they do, but not too bad) and the dubious utility of TLH over time, the fact that these are money-loosing startups pushing hard on marketing to gain exponential growth would keep me from putty money there. Dealing with those 20 ETF on my own later sounds like a huge pain. And could be seen as a tactic to keep customers: "see how difficult this is, you can't leave us..."
Another choice quote [emphasis mine]:
But being very cheap means Betterment and Wealthfront need lots of assets to turn a profit. Their AUM of roughly $2.9 billion each, accumulated largely in the past two years, delivers revenues of $7m or so a year. That is not enough to sustain around 100 staff each as well as hefty marketing budgets. Total costs are likely to be $40m-50m a year, according to one fintech grandee (neither firm discloses the data).
Wow, really puts things into focus. When a company starts making decisions which sound good for marketing, but make their customers worse-off (like Municipal bonds), that's a big warning flag. This begins to explain why.
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indeed, I wasn't sure that I would keep Betterment after my free 6 months were up. And you wonder how many others are like that. What appealed to me was that I sold some real estate at a profit, so I wanted to take advantage of the TLH algorithm to help offset that, that being said, I'm not sure it did any better than I would have on my own considering the huge drops we had a couple months ago. And during those drops, Betterment sold earlier than I would have on my own, meaning less TLH than ideal.
I'm not against the value tilted allocation though, I prefer it.
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Great analysis, tod! Thanks for taking the time!
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Does anyone else hold the impression that robo-advisors have peaked, and it's like "is that it?"
It seems very short-sighted of me but I can't see where the next quantum leap in efficiency gains are going to come from. We've got fractional ETFs, tax loss harvesting, etc. Maybe there are some small tweaks towards the "perfect" asset allocation still to come. Maybe we can get rid of emergency money altogether and be fully invested at all times. But my overall impression is that even with all the stuff robo-advisors have supposedly given us, improvements in risk/return have been utterly underwhelming.
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A scathing review of Wealthfront, and Robo-Advisors in general, mirroring many of the points in this thread:
https://medium.com/@blakeross/wealthfront-silicon-valley-tech-at-wall-street-prices-fdd2e5f54905#.km7xj1tev
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A scathing review of Wealthfront, and Robo-Advisors in general, mirroring many of the points in this thread:
https://medium.com/@blakeross/wealthfront-silicon-valley-tech-at-wall-street-prices-fdd2e5f54905#.km7xj1tev
Previous discussion:
http://forum.mrmoneymustache.com/investor-alley/wealthmentbetterfront-nail-in-the-coffin-article/msg724264/#msg724264
http://forum.mrmoneymustache.com/investor-alley/the-best-case-against-bettermentwealthfront/msg727150/#msg727150
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
(http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20151031_FNC334.png)
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
Thanks for this reminder. I pulled the plug on betterment last week. I need to be in funds that I'm confident will still be around in 30 years with the same or better price structure. There is zero confidence in Betterment to do that and I have zero interest in managing all of those ETF's. The expectation of a consistently low price structure limits one to index funds (preferably Vanguard's), Vanguard active funds, and a maybe a handful of other firms such as Dodge & Cox or Primecap.
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
(http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20151031_FNC334.png)
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
At first that chart confused the hell out of me. How did they have the most assets under management back in 2012? And haven't they been advertising a ton, why are their assets under management shrinking.
Then I saw the graph was PERCENT INCREASE over previous month, not absolute assets.
Jesus. That chart shows the opposite of what it says. They're growing, monthly, by ridiculous amounts.
Yes, the growth is slowing, but that's because it's a percentage, and as their asset base gets larger, it's harder to grow a larger percentage.
I'm no fan of those companies, but that chart is pretty good for them.
Let me know when they're negative percent (I.e. People are taking more out than putting in) for two months in a row (or even once).
If they're growing 5% a month right now, that's still a RIDICULOUS rate of growth.
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This seems like an appropriate place for this article.
http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not
Robo-advisors see slower growth, and probably have trouble being profitable.
(http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/print-edition/20151031_FNC334.png)
In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:
1. Sell everything and pay a steep capital gains taxes.
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.
At first that chart confused the hell out of me. How did they have the most assets under management back in 2012? And haven't they been advertising a ton, why are their assets under management shrinking.
Then I saw the graph was PERCENT INCREASE over previous month, not absolute assets.
Jesus. That chart shows the opposite of what it says. They're growing, monthly, by ridiculous amounts.
Yes, the growth is slowing, but that's because it's a percentage, and as their asset base gets larger, it's harder to grow a larger percentage.
I'm no fan of those companies, but that chart is pretty good for them.
Let me know when they're negative percent (I.e. People are taking more out than putting in) for two months in a row (or even once).
If they're growing 5% a month right now, that's still a RIDICULOUS rate of growth.
For a tech startup, especially with VC capital, that level of growth and that trend is death. I doubt anyone at Betterment/Wealthfront, or their VC investors, see these charts as pretty good for them. This is the type of data that leads to a pivot (https://en.wikipedia.org/wiki/Lean_startup#Pivot), like when Wealthfront pivoted from active trading to passive indexing. I'm not sure where they'd pivot to next, but it's inevitable if things don't pickup fast. Not a good place to put your money if you're expecting the company to stick around in its current form, or for their investing strategy/fee structure to not change for the next 30+ years.
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For a tech startup counting active signups and free users, yes. For counting assets under management, a significantly more serious commitment then signing up for a free account, no.
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For a tech startup counting active signups and free users, yes. For counting assets under management, a significantly more serious commitment then signing up for a free account, no.
Your opinion is not consistent with the people running tech startups, or more specifically, the VCs investing in tech startups. No need to take my word for it, it's public information. Heck, you could even use the linked article in the post you quoted as a source :)
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For anyone finding this later:
WiseBanyan Robo-Advisor now supports Tax Loss Harvesting, fee capped at $20 /mo (http://forum.mrmoneymustache.com/investor-alley/wisebanyan-robo-advisor-now-supports-tax-loss-harvesting-fee-capped-at-$20-mo)
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Does anyone else hold the impression that robo-advisors have peaked, and it's like "is that it?"
It seems very short-sighted of me but I can't see where the next quantum leap in efficiency gains are going to come from. We've got fractional ETFs, tax loss harvesting, etc. Maybe there are some small tweaks towards the "perfect" asset allocation still to come. Maybe we can get rid of emergency money altogether and be fully invested at all times. But my overall impression is that even with all the stuff robo-advisors have supposedly given us, improvements in risk/return have been utterly underwhelming.
I've kind of gotten the impression that actively managed mutual funds have peaked. At least, the majority of new individual money is going into index funds. But active funds are still around.
And what about full service brokerage houses? They're still there.
As long as they provide a value proposition for somebody, they're going to continue to grow. I like them, but they're not for me. If I'm not around to manage funds, I'd have my DW use them. The alternative would be 100% CDs or a whole life policy or annuity from the first "financial advisor" to come along. ("Betterment charges .15% to manage your funds. They'll do it for FREE!)
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I think the .15% fee is justified if:
- The value tilt works out. The theory is that a value tilt will beat a non-tilted portfolio (otherwise, why do it?)
- Confidence in the algorithm allows you to stay the course, particularly during market downturns.
- The different approach gets you to invest where you might have been too scared to invest.
- TLH is useful for you (and you're willing to pay someone else to do it for you.) Actually, same goes for the value tilt -- you can do it on your own.
- You want to outsource this investment stuff and focus on something else in your life.
The potential return of value tilt vs none could exceed .15%. Or not.
Selling after a collapse in a panic could cost much more than .15%. Of course, robo-advisors have yet to go through a major crash. It's unknown if they can hold their novice audience through one.
TLH is just a marketing pitch to the novice investors the robo-advisors are targeting. It does have a benefit, but it doesn't pay for the fee in the long term. It also doesn't have to.
I tried Betterment. I liked it. I would recommend it to the right person. I'd also recommend Vanguard advisory services to the right person. Neither are for me, because I can handle it myself and I don't want to pay the fee.