My Robo-Advisor Journey

Ready to start your 1st Portfolio without a financial advisor? First, you will need to decide between DIY vs Robo-Advisors vs Target-Date Funds.  I covered the basic differences between the 3 in another post but today I will focus on robo-advisors.  DIY investing is not for everyone and while you understand why you need to minimize fees, you are ok with paying a little bit to have the process automated. Luckily there are plenty of options these days to take over the tasks of managing a portfolio and not cost a fortune but the real question is are robo-advisors worth it?  This is my robo-advisor journey over the past 8 years.

Robo-Advisor Overview

Designing a portfolio is not hard but buying, selling, and rebalancing can be time-consuming. Also, some people don’t care to spend time figuring out what a mutual fund is or how bonds work.  Enter robo-advisors.  I’m sure most of you have seen the ads from startups like Betterment and Wealthfront selling you on the concept of a great portfolio in a couple of clicks. But what is a robo-advisor?

Computers have been involved in stock trading for decades but it was mostly for large Wall-Street firms to run analyses, high-frequency trading, or other institutional level work. 10 years ago the concept of using computers with preset algorithms emerged from the fires of the 2008 financial crisis.  The concept was simple, have a computer design a portfolio that invests in low-cost index funds based on the risk profile of the investor.  The computer automatically rebalances the portfolio and provides some marginal benefits like tax-loss harvesting.  

Betterment is considered to be the first company to take the technology to market but now there are more than 100 robo-advisors. Most large investment firms have their own version of a robo-advisor.  Still begs the question are robo-advisors worth it?

My Robo-Advisors

Being a tech geek that enjoys investing, robo-advisors were a natural fit.  I liked the concept of investing in low-cost index funds, automatic rebalancing, and taking advantage of technology.  

Betterment

I started my robo-advisor journey in 2011 with Betterment for a small taxable account that I set up with automatic monthly investments.  My money was invested in low-cost index funds that got automatically rebalanced.  Everything was great because the market was on a bull run and every time I opened the app I would see positive returns which just encouraged me to invest more.  The gamification part of robo-advisors really rang true to me because I felt engaged with a positive feedback loop.

Wealthfront

Eventually, I got the itch to try another startup and opened a Wealthfront account alongside my Betterment account.  Wealthfront had a slightly different strategy where they would buy individual stocks to effectively create their own index-fund.  This saved them the cost of the ETF expense ratio and gave them more flexibility when it came to things like tax-loss harvesting and rebalancing. I would always compare the returns between Betterment and Wealthfront but rarely found a noticeable difference. 

Personal Capital

Later, I got suckered into opening a Personal Capital investment account.  I was wary of the 0.89% AUM fee but they made a decent pitch about their strategy.  They use an equal-weighted investing strategy where the equity portion of the portfolio is split equally among 10 different sectors.  When one sector does great then they rebalance to get back to an equal-weighted portfolio.  The thought is that you are buying low and selling high since these 10 sectors are always playing musical chairs. 

Schwab Intelligent

Finally, I opened a Schwab Intelligent portfolio account because when they launched the service, I already had a checking account and donor-advised fund with Schwab.  There was a bunch of discussion about their business model where they hold part of your portfolio as cash but then don’t charge a fee.  Some argued that your money was underinvested while others were upset about the slight of hand where they give you a free service but make money off your cash.   I didn’t really agree with either of these arguments because 1.) there is no free lunch and 2.) the cash portion should be compared to bonds not equities and recently they have been pretty much the same in terms of return. 

AUM FeeMinimums
Betterment
0.25%None
Wealthfront0.25%$5000
Personal Capital0.89%$100,000
Schwab Intelligent0.0%$5000
My Robo-Advisor Horserace

From 2012 to 2014,  I was invested with Betterment, Wealthfront and Personal Capital with equal amounts in each account.  The plan was that by comparing them side-by-side I could pick a clear winner and stick with one going forward. 

Personal capital would at times have better returns but that would get eaten up with the higher fees.  Betterment and Wealthfront were always neck and neck but I preferred Betterment’s app and interface over Wealthfront’s.  The minor differences in their strategies didn’t seem to make a difference in the returns

In 2015, Schwab started their robo-advisor service and rather than adding a 4th horse to the race I decided to withdraw from Personal Capital and move those funds over to Schwab.  This was not an easy process and I would not recommend it to anyone.  Selling funds and avoid short-term capital gains taxes was a pain but eventually, I was able to get the funds either into my Schwab Intelligent account or my donor-advised fund (DAF).

Wealthfront was the next one I decided to walk away from because I didn’t like the concept of investing in individual stocks.  I am a big believer in low-cost index funds and if you are creating your own fund then I felt like I’m investing in a high-cost index fund.  Liquidating this account also was not fun because I had a portfolio full of individual stocks.  Some got sold and others got donated to our DAF.  

Finally, I was down to 2 horses and it wasn’t really much of a race. Schwab Intelligent was clearly outperforming Betterment on a consistent basis.  Betterment then decided to raise its fees from 0.15% to 0.25% but I thought they would grandfather in their loyal customers … wrong.  This is probably the best way to lose your loyal base by not acknowledging the fact that they were with you from the start.  Anyway, this made it an easy decision to consolidate all my robo-advising accounts to Schwab. 

The Winning Horse

For the past 2 years, I have been using Schwab Intelligent exclusively for my taxable accounts.  We opened a joint account as well to link into our household budget where a fixed amount gets invested automatically.  The returns have been on par with the rest of the market when comparing to a 95/5 stock to bond portfolio. They take care of the tax-loss harvesting which does open the risk of a wash sale since it doesn’t have insight into my other accounts but I believe this risk is low.  I manually manage my other accounts and would avoid buying a similar fund if I notice it was sold in my Schwab Intelligent account. 

Would I recommend robo-advisors to new investors? Yes.  While it is not hard to set up a 3-fund portfolio or simply invest in the target-date fund, robo-advisors have a way of tapping into a part of your brain that forces you to invest more.  You don’t have to worry rebalancing and you can simply set-it and forget-it. The analysis-paralysis involved with decision making can cost new investors more money than a small fee or forced cash allocation.  

My robo-advisor journey has been a good learning experience but probably more complicated than it needed to be. Who knows what investment vehicles will come out next and how I will get involved but for now I am happy with my Schwab Intelligent account.   

Have you used robo-advisors?

–Dr. Linus

8 comments

  1. That is a great overview of the big name robo-advisors. When I joined Personal Capital for free I did accept their free portfolio analysis and created a powerpoint presentation which demonstrated their equal sector weighting strategy. It definitely was a convincing argument but like you I ended up not using their services to cut back on the fees.

    A robo advisor may be good to setup in case something happens to you so your heirs don’t have to necessarily have to learn everything on the fly of your particular investing strategy.

  2. I’ve thought about using a roboadvisor for my taxable account as well. I havny done it because the taxable portion of our account is relatively small and simple (just vtsax). I couldn’t justify the cost for the benefits which in this case would just be tax loss harvesting since there is nothing to rebalance or allocate for now. Maybe in the future I’ll reconsider when instead of shoveling money at loans we will be filling up this taxable account.

    1. If your taxable accounts are small and invested in a single fund then you def don’t need a robo-advisor. In reality no one NEEDs a robo-advisor but I do consider it a better alternative to a traditional financial advisors. Eventually, once loans are paid off, you will need to shovel that money somewhere and only VTSAX might not fit your needs.

  3. I’m excited to see how Personal Capital portfolio’s fair in a more bearish market. Their pitch seems centered around avoiding concentrated risk in Tech & Finance (hence equal weighting) and thus if this bull market at some point ends they might be in a better place to weather that storm, for than reason and in addition to taking a more active rebalancing approach. Also they have a higher % of international stocks which have severely under-performed US assets in recent years. Time will tell!

    1. You will have to keep me updated on how that plays out since I don’t have insight into their returns anymore. Fundamentally I agree with the concept but will it be better than 0.89% AUM fee. Also, is it worth giving up returns on the way up to take less of a hit on the way down? As you said, time will tell!

  4. Appreciate this article!

    I found robo-advisors to be a milestone on the way to building the confidence to execute a complete DIY portfolio. If you take this much interest, it seems you are 1-2 years away from simply transferring everything in kind to a DIY brokerage. I tend to advise friends who are considering this (who are young with a long investment horizon) to simply put everything in VTSAX for a year, which allows enough time for self-confidence to blossom sufficiently to create a 3 fund portfolio and run it on their own.

    I’d be curious to see a comparison to determine if a 3 fund lazy portfolio at Vanguard, even without tax-loss harvesting, would have beaten the robos in your horse race.

    Fondly,

    CD

    1. Thanks for stopping by CD!

      I agree this is like training wheels and eventually you have the knowledge and desire to DIY. Friends of mine that signed up for betterment or schwab (at my nudging) end up telling me they invested more than they planned which is attribute to the gamification part.

      The only part where I think robo or target date funds excel is ease of use which might cause people to invest more. It’s like the Amazon effect where you buy more because it’s easy rather than need.

      I DIY my solo 401k and Roth but the time lines are little off for it to be a fair Apples to apples. I suspect it will be fairly similar if not better for DIY.

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