The True Cost of a Robo-Advisor

[tj]

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.

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.

[arebelspy]

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.

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.

[Interest Compound]

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.

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, 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.

[arebelspy]

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.

[Interest Compound]

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 :)

[Interest Compound]

For anyone finding this later:

WiseBanyan Robo-Advisor now supports Tax Loss Harvesting, fee capped at $20 /mo

[Wolf359]

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!)

[Wolf359]

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.