What are robo-advisors? Definition
A robo-advisor is an automated online financial advisor. It is a computerized system, which will invest your assets into a diversified portfolio containing simple instruments
- ETFs or mutual funds
- Cash or money market
which fits your goals, risk tolerance and target retirement objectives.
Robo advisors use complex computer algorithms based on Modern Portfolio Theory, Efficient Market Hypothesis or brute force simulations to calculate the best asset allocation matching your risk tolerance and needs.
What are the three main qualities of robo-advisors?
By comparison to traditional financial advisors and Registered Investment Advisors, robo-advisors have the three main qualities
- Low costs: a robo-advisor will typically charge you 0.25% of the AUM it manages. A wealth manager will typically charge 1% -2%, if not more.
- Wealthfront charges no management fee under $5,000 and 0.25% above.
- Betterment charges %0.25 up to $2,000,000 and 0.15% above for the standard plan.
- Personal Capital is free for its basic service.
- Low minimum amounts: robo-advisors have very low requirements to start investing with them, if any. Starting at $0 to a few thousands, robo-advisors easily beat the capital requirements registered by usual RIAs, which often require north of $100,000 or $1,000,000, if not more.
- Wealthfront requires a minimum deposit of $500
- Betterment has no minimum requirement
- Schwab requires a minimum of $5,000
- Convenience, user-friendliness and peace of mind. Robo-advisors are there to automate the investment process and relieve you from the task of monitoring, allocating, trading, transferring. Their applications are easy to use and efficient. They will teach you the basics and will handle the rest. They are the easiest way to start saving money for your retirement.
Which are the main robo-advisors?
There are several dozens of robo-advisors, but a few are more prominent due to their size, history, or originality.
The two biggest players are now Vanguard and Schwab, with $140 bn and $41 bn of assets under management as of June 2019. These two players are actually traditional asset managers, who are offering these new distribution avenues into their existing funds.
Betterment was the first player of the robo-advisor segment, starting in 2009. With no minimum assets and 0.25% fees, it already has $18 bn in assets. It is known for its user-friendliness and behavioral investment research and invests into ETFs. It offers several atypical strategies, of which ESG/SRI (Environmental, Social, and Governance / Socially responsible investing) and smart betas.
Wealthfront is Canadian company managing $20 bn. It charges no fees under $5,000 and 0.25% above that threshold, with a minimum asset requirement of $500. Besides its low fees and cash requirement, Wealthfront is renowned for the quality of its research and its tax-efficiency offering. It offers access to ETFs across 11 asset classes.
Overall growth of robo advisors
Robo-advisors are meeting a remarkable growth in both AUM and numbers of clients, although this growth is expected to slow down in the future.