Robo-advisors: Costs and minimum assets
Since robo-advisors construct a different asset allocation for each investor, it is difficult to assess the risks and financial performance of one robo against another.
On the other hand, their management fees and their minimum asset requirements can easily be compared, although the true cost of a robo-advisor isn’t just its management fees.
Who are the main players in robo-advisory?
Initially targeting the Chinese market, Vanguard eventually developed the Vanguard Digital Advisor and Vanguard Digital Advisor Services, which offers access to its 6,0000 mutual funds for a 0.30% fee and a minimum of $50,000. If your assets are under $500,000, Vanguard gives you access to a pool of advisors for an extra fee. Above this threshold, you can have your own dedicated advisor. Vanguard Digital Advisor Services is the online-only version with no human interaction. It offers allocation services for 0.15% annually and a minimum of $5,000. Vanguard will invest in all your enrolled accounts (individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k)) and will optimize the tax-efficiency of your overall portfolio. Vanguard managed $115 bn in automated systems as of March 2019 and $140 bn as June 2019
Schwab’s robo service is called « Intelligent Portfolios ». With a $5,000 minimum level and no fee, it is entirely online with no advisor you can call. Schwab uses its own sets of investment funds, over 20 different asset classes. They can offer Roth & traditional IRAs, 529s, retirement income withdrawals. Tax loss harvesting uses back-up ETFs. Their allocation is based on Modern Portfolio Theory.
Wealthfront started in 2011 and has a huge appeal for Millennials. It emphasizes tax-efficiency. With a $500 minimum deposit, you can invest into ETFs in a variety of Accounts for 0.25% fee. It offers some services at a premium. Funds are held at the Royal Bank of Canada.
The first two participants in the robo advisor segment are also among the largest:
Betterment started offering robo-advising in 2009. They now manage over $16 bn. Betterment’s fee is decreasing with AUM. No minimum amount is required. Starting at 0.25%, the fee will eventually reduce to 0.15% for the assets above $2m. In the premium plan, you have access to financial planners, provided that your assets are larger than $100,000. The fee then rises to 0.40% (0.30% above $2m). Betterment is known for its user-friendly app and its behavioral research, which makes it very user-friendly. Betterment requires that you bring your cash to its self-contained platform, as it will not manage assets in your existing accounts.
Personal Capital, which also started in 2009, has a mixed model, where it offers free services, while the additional services are reserved for larger AUM (starting at $100,000) and larger fees (starting at 0.89% and decreasing to 0.49% for $10,000,000 and over). It managed $8.5bn in March 2019 and $12.2 bn as of Dec 2019, but doesn’t give the breakdown of free and paying AUM. Personal Capital targets more affluent investors.
Their comparative offer
Here are the comparative offers of the main players, as of March 2019:
Here is a list of other players with a few characteristics of their offerings:
- TD Ameritrade recently jumped to $17b. It doesn’t disclose its number of accounts. It requires a $5,000 minimum, 0.30% fees. Virtually unknown a few years ago, it now counts among the large asset managers.
- Bloom, $3b, 23,000 accounts, also offers 403(b), does not require transfer onto its platform.
- Wealth Simple: $2.6b, 100,000 accts, Canadian origin, present in the UK, no minimum, offers ESG and Halal funds. For an extra 0.50% fee, you can have a licensed FA on the phone.
- u: $560 m, 480 accounts.
- u: $500m, 100, 000 accounts, combines DIY investing with robo, pre-made portfolios, HF replication, and a 0% fee alternative.
- Ellevest: $190m, 16,000 accounts, target women, offers REIT, muni bond funds. It offers to its premium users a human access (financial planners, career counselors).
- Axos Invest (formely known as WiseBanyan): $170m, 25,000 accounts. Tax-loss harvesting is a small charge feature.
- Zacks Advantage: $100m, 500, for wealthier investors, applies its earnings-based research, $25,000 min.
- Validea Legends Advisors: $5m, 50 accounts.
- Acorns: will round up all your credit card expenses and invest it into your allocation.
- Ally Invest: zero comm for stocks and ETFs.
- BuildingBenjamins (from Tradition Capital), include reinsurance, commo, alternative lending and others strategies
- Elm Partners: for HNW, offers a superb platform for a rock bottom 0.12%, marries value and momentum strategies
- SigFig: manages your accounts at Schwab, fidelity… free for assets under $10,000.
- Stash App: Start as little as $5.
- RobinHood: gets the client name, then offer financial services.
- Fidelity Go: $10 minimum, offers access to its own funds.
The fees, assets and vehicles are generally similar (with a thumb up for Betterment’s assets) but the minimum amounts and the services offered can make a significant difference.
One should also take into account the quality of the research and of the performances to assess a robo-advisor. This part cannot be easily accomplished. This issue is addressed in the advanced course.
The true costs of robo-advisors
The management fees indicated above are a bit fallacious. Investors pay the fees for the allocation and services rendered by the robo-advisors, but they also pay the management fees or expense ratios of the funds and ETFs that the robo-allocator has selected. Since fees varies on AUM and services, the comparison is seldom difficult.
Here are the comparisons for the relatively similar services of five large providers, at various AUMs. The analysis takes a 60/40 stock/bond mix, and assumes that all vehicles are tax-deferred, to eliminate the effect of tax efficiency and tax harvesting. Vanguard does not offer robo-advisory services below $50,000 and its cost is not computed in the first two charts.
Here are the calculations at $5,000.
The calculation is very similar for the following amounts. The results are
As you can see, the management fee of the robo advisors is far from negligible in comparison to the invested funds’ expense ratios. Schwab’s fund fees may be higher than the ETFs or funds used by other robo-advisors, but the overall cost of the firm’s robo-advisor is actually the lowest.
Robo-advisors are a disruptive technology
We can see another big difference between robo-advisors and the usual registered investment advisors in the comparative offer of the many providers. If you compare the AUM of the robo-advisor to its number of accounts, you will obtain the average AUM per investor:
Even if you consider the robo-advisors targeting more affluent investors (with minimum assets or more valuable services), you can see that the types of clients handled are much less wealthier than those handled by RIAs (typically in the $ millions).
Robo-advisors are not targeting the same clients as RIAs. The cost structure of RIAs – fixed fees, salaries, etc – do not allow them to go lower than the 15% most affluent individuals. Robo-advisors, on the other hand, can handle down to the lowest percentile of the population by wealth.
Robo-advisors are capitalizing on this low-cost but efficient capacity and are actually offering themselves as a service to the RIAs. Robos offer premium services through special API connections and accounts which enable RIAs to manage their clients’ assets directly with robos. The financial planners free themselves of the time-intensive operations of moving cash, trading, rebalancing, optimizing the tax-efficiency… allowing them to concentrate on the human part of the equation: financial planning, estate planning, etc.
Another interesting dimension of robo-advisors comes from the number of customers in relation to the number of their employees. While a financial advisor typically manage ~100 clients, Betterment indicates that it has over 400,000 clients per advisor. It is simply impossible for Betterment client to pick-up the phone and ask a question; Betterment just doesn’t have the staff to handle such a service – robo-advisors are entirely automated.
Thanks to their low costs and automated environment, robos are changing the asset management industry. They widen the client pool. They offer services previously not available to most individuals. Robo-advisors are a disruptive technology and their presence has attracted the attention of both the media and venture capitalists (robos are VC-funded).
The media buzz has changed notably during the decade since the first robo-advisors were introduced. From “Are robo-advisors safe?”, the question asked by the public and the media has involved into “Which robo-advisor is best?”. The largest asset management companies (Vanguard, Schwab, Fidelity…) have all picked up on the change, taken it seriously and launched their own applications. Their move is a confirmation of this new investment industry.
By widening the pool of investors, robo-advisors have also provided financial training and knowledge to a considerable number of individuals. Savings, ETFs, allocations, tax efficiency, risk tolerance, long-term planning are not the easy concepts to understand; robo-advisors have succeeded in disseminating those concepts to a wide audience. Their apps are actually a great source of information and knowledge for the general public.