Just like in traditional asset management where there are thousands of advisors offering different levels of service. It is easy to paint all robo-advisors as “essentially the same,” as they all appear to offer financial management for low cost, utilize limited to no human interaction, and generate their recommendations based on similar algorithms. Upon further research, there can be strikingly large differences between the different firms. There are many options to choose from and we will help you sort through the differences between them all.
Services Offered As expected, different advisors will offer different levels of service, often at different price points. Some advisors specialize in asset advisory services while others offer a more holistic financial planning service. We will look into the different services offered between the main advisors in the industry over time. Algorithm The key to the whole robo industry is the algorithm behind each electronic advisor. These algorithms are usually based upon Modern Portfolio Theory (MPT) and are rules-based to create a personalized approach to each individual based on risks and financial needs. It is extremely important to understand how the algorithm decides your asset allocation and what assumptions are baked into these numbers. We will take a deeper dive into the mysterious cloud of the algorithms that are behind the exponential growth of this industry. Investment Vehicles A major difference between algorithm-assisted investing is the underlying investments used in the portfolio. For instance, there are thousands of ETF’s that accomplish different goals and have varying returns due to the weightings and allocations within them. Two similar algorithms that suggest a 5% weighting in a Japan ETF may ultimately lead to a client investing in different ETFs such as the DJX from WisdomTree and EWJ from iShares. The variations in the underlying assets will create a variance in returns between the two funds. It is important to understand what the underlying assets are of the funds that are chosen for you. Cost Obviously, cost is a major differentiator between Robo-advisors. All-in costs can range from as little as 0.15% to over 1.00%. We always recommend you find out the all-in cost when deciding on a robo-advisor. This includes trading, advisory fees, commissions, and ETF expense ratios. Sorting through the options Over time, we will discuss the pros and cons of each investment option on our list. Please continue to check back as we compare all of the many options available to you. |
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