Author Topic: Article: The True Costs of Robo Advisors  (Read 4223 times)

arebelspy

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Article: The True Costs of Robo Advisors
« on: June 12, 2015, 09:50:22 AM »
http://investorjunkie.com/42668/true-costs-robo-advisors/

They compare Betterment, Charles Schwab, and Wealthfront.

Schwab wins for everything but  very small amounts.

(And, of course, DIY is even cheaper.)
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trailrated

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Re: Article: The True Costs of Robo Advisors
« Reply #1 on: June 12, 2015, 09:59:02 AM »
Thanks for posting the article! I am giving a presentation at our local bogleheads meeting on robo advisors next week. This will come in handy.

skyrefuge

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Re: Article: The True Costs of Robo Advisors
« Reply #2 on: June 12, 2015, 10:20:30 AM »
Schwab wins for everything but  very small amounts.

Well, not really. Yes, Schwab wins if you only look at the costs he included in the tables, but the numbers in the tables don't tell the whole story, since they ignore the opportunity cost of Schwab's high cash allocation.  The article doesn't ignore that opportunity cost, but it oddly omits it from the tables (what everyone is going to look at) and saves the discussion for after the tables, when most people have stopped reading. "If you add that amount to Charles Schwab’s annual expenses, they then become the most expensive firm."

There was also no discussion of the relative "gains" possible from automated tax-loss harvesting.

arebelspy

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Re: Article: The True Costs of Robo Advisors
« Reply #3 on: June 12, 2015, 10:47:07 AM »
Schwab wins for everything but  very small amounts.

Well, not really. Yes, Schwab wins if you only look at the costs he included in the tables, but the numbers in the tables don't tell the whole story, since they ignore the opportunity cost of Schwab's high cash allocation.  The article doesn't ignore that opportunity cost, but it oddly omits it from the tables (what everyone is going to look at) and saves the discussion for after the tables, when most people have stopped reading. "If you add that amount to Charles Schwab’s annual expenses, they then become the most expensive firm."


Very good points, thanks for going past the sound-bite.  :)

There was also no discussion of the relative "gains" possible from automated tax-loss harvesting.

Do not all of them do TLH?  Shouldn't it be a wash (aside from minor differences due to allocation)?
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investorjunkie

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Re: Article: The True Costs of Robo Advisors
« Reply #4 on: June 12, 2015, 02:33:54 PM »
Schwab wins for everything but  very small amounts.

Well, not really. Yes, Schwab wins if you only look at the costs he included in the tables, but the numbers in the tables don't tell the whole story, since they ignore the opportunity cost of Schwab's high cash allocation.  The article doesn't ignore that opportunity cost, but it oddly omits it from the tables (what everyone is going to look at) and saves the discussion for after the tables, when most people have stopped reading. "If you add that amount to Charles Schwab’s annual expenses, they then become the most expensive firm."

There was also no discussion of the relative "gains" possible from automated tax-loss harvesting.

Hi writer of the article on Investor Junkie Larry Ludwig.

We separated out the opportunity cost because it's a "soft" number. The purpose of the article was to JUST focus on costs of the services, though do mention the opportunity costs.

In addition most individuals open IRA accounts so TLH isn't available in those accounts. Again also it's another "soft" number since it depends upon the market.

« Last Edit: June 12, 2015, 02:36:58 PM by investorjunkie »

SpicyMcHaggus

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Re: Article: The True Costs of Robo Advisors
« Reply #5 on: June 17, 2015, 12:38:54 PM »
"access denied"

tj

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Re: Article: The True Costs of Robo Advisors
« Reply #6 on: June 19, 2015, 07:32:33 PM »
Schwab wins for everything but  very small amounts.

Well, not really. Yes, Schwab wins if you only look at the costs he included in the tables, but the numbers in the tables don't tell the whole story, since they ignore the opportunity cost of Schwab's high cash allocation.  The article doesn't ignore that opportunity cost, but it oddly omits it from the tables (what everyone is going to look at) and saves the discussion for after the tables, when most people have stopped reading. "If you add that amount to Charles Schwab’s annual expenses, they then become the most expensive firm."

There was also no discussion of the relative "gains" possible from automated tax-loss harvesting.

Hi writer of the article on Investor Junkie Larry Ludwig.

We separated out the opportunity cost because it's a "soft" number. The purpose of the article was to JUST focus on costs of the services, though do mention the opportunity costs.

In addition most individuals open IRA accounts so TLH isn't available in those accounts. Again also it's another "soft" number since it depends upon the market.

I don't agree with the bolded. There is zero reason to use a robo-adviser in a tax-advantaged account. The TLH and optimized rebalancing s the whole point of the robo. if it's not in a taxable account, you might as well use a target date fund, or even some actively managed funds since taxes aren't an issue.
« Last Edit: June 19, 2015, 07:34:52 PM by tj »

NorCal

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Re: Article: The True Costs of Robo Advisors
« Reply #7 on: June 21, 2015, 10:01:48 AM »
Good article that confirmed my research.

I'm actually giving the Schwab service a try with one of my IRA's (small part of my stache) to see how it works out.

After my research, I'm comfortable with the fees, and the cash allocation doesn't bother me after I researched the reasons behind it.  By running a few sample portfolios with different risk tolerances, it looks like they're trying to maximize the Sharpe ratio.  Essentially, by adding cash in part of the portfolio, they are adding risk in other parts.  It's a little counter-intuitive, and I understand why some people don't like it.  But I'm intrigued enough to give it a try.