I’m often asked for my view of robo-advisors.  Let’s first define the term.  “Robo-advisors” refers to a new breed of investment advisors who provide their services primarily online.

Some, like Wealthfront, provide no interaction with human advisors.  Others, like Betterment and Vanguard, provide hybrid advice.  They have sophisticated online portals, supplemented with the availability of human advisors.

NerdWallet did an exhaustive review and ranking of robo-advisors.

Fees for robo-advisors are significantly below those charged by traditional advisors.  They range from free to 0.40% of assets under management.

The leading “free” robo-advisors are WiseBanyan and Charles Schwab.  “Free” is slightly misleading.  Some services included in the fees charged by other robo-advisors are only available at an additional cost from “free” advisors.  Other “free” services have more limited investment options and other restrictions.

What I like

I believe robo-advisors have made a very positive contribution to providing intelligent and responsible investing options to investors at a lower cost.  Almost all robo-advisors are index-based, meaning they subscribe to the view that trying to “beat the market” through stock picking, market timing, and fund manager selection is a loser’s game.

They provide rebalancing and tax loss harvesting services, which can make a positive contribution to your returns over the long term.

They focus on keeping costs and fees low, which has been shown to correlate positively with higher returns.

What I don’t

Since fees – even lower ones charged by robo-advisors – can reduce returns, you shouldn’t pay them if you can deal with less expensive alternatives.

Do-it-yourself investors can easily put together a low-cost portfolio using Target Retirement or LifeStrategy funds available from Vanguard and other fund families.  These funds require no rebalancing.  Tax loss harvesting can easily be done on your own or with the assistance of your accountant at no cost or a modest hourly charge.

Investors who require financial planning services might be better served by retaining a qualified financial planner who bills hourly or on a flat fee basis, rather than based on assets under management. You can find a list of these planners on the Garrett Financial Network website.

Many investors are well served by traditional advisors who charge higher fees but provide more comprehensive, holistic wealth management services.  These services can add significant value, net of the fees you are paying.

Final thoughts

I credit robo-advisors for bringing much-needed innovation to the investment advisory business and making their services available to those who were not well-served previously.

The viability of the smaller, independent firms is in question.  It’s difficult to compete with industry giants like Schwab and Vanguard who have entered this space.  If you decide to go with a robo-advisor and are concerned about this issue, you might consider going with one of the larger entrants.

Resource of the week

I recommend this article by NerdWallet for more information about robo-advisors.