Here at RR, it’s no surprise that we are huge proponents of the roboadvisory industry. I mean what's not to like about an industry attempting to help millions of people by democratizing the process of investment management? That's some pretty noble stuff for sure.
However, for all the talk about the huge cost advantage of roboadvisors, we wanted to explore whether the option was really worth it. We found that, like so many other things in life, it depends. Sure, roboadvisors easily trump the 1% charged by traditional financial advisors, but it some cases, other options might actually provide better value. For reference, some of the industry’s larger roboadvisors charge around 0.25% of assets plus roughly 0.10% for the underlying ETFs. Let's take a look at some other (quite competitive) options:
The financial equivalent of the "weekend warrior," a whole subsection of individual investors (all with varying backgrounds) have taken it upon themselves to learn enough about investing to be comfortable managing their own assets. This approach, however, is not for the half-hearted. An individual not willing to commit to learning all the best practices associated with personal investment management will likely do much more harm than good. A passionate group of these “go-it-aloners” can be found at www.bogleheads.org. A popular approach often cited on this forum is the “three-fund portfolio” consisting of some combination of Vanguard’s Total Stock Market ETF (VTI), Total International Stock Market ETF (VXUS), and Total Bond Market ETF (BND). Collectively, these three funds provide exposure to domestic equities, international equities, and fixed income and an investor can set the most appropriate mix between the three based on their own individual situations.
Bottom Line: Depending on the allocation, some sort of weighted average between 0.05% (VTI), 0.14% (VXUS), and 0.08% (BND)…plus an initial investment of time and energy to get up to speed on DIY portfolio management.
Life Cycle Funds
These are mutual funds that will target a certain calendar year (representing a targeted retirement date) and then follow a glide path, shifting allocation between asset classes to become more conservative as the “target date” approaches. It is a complete portfolio in a single fund. Looking at the prospectus for one of these funds, an investor does not pay a management fee, but instead just pays the underlying fees on the acquired funds. Like roboadvisors, these funds provide a simple, singular solution, only arguably at a lower cost.
Bottom Line: For Vanguard, 0.16% to 0.18% depending on the fund.
This is really more hypothetically speaking, but with roboadvisors creating a scalable (read mechanical) approach to investment management, why not charge a fixed price? Cast the “percentage of assets” pricing model aside! One of these budding companies will eventually carve out its place in the world by offering its solution for a single set fee regardless of size and the cost improvements for large accounts will be tremendous.
Check out more articles written here at RoboRiches in our archives.
There are many roboadvisors to choose from; each with distinct characteristics and a wide variety of services offered. We break down the similarities and differences between these firms here at The List.