When it's time to change robo-advisers
Robo-advisers manage more than $50 billion in assets, and their usage rose 200 percent in 2015 alone. But the one you choose first isn't always the best fit.
Five years ago, you probably hadn’t even heard the term robo-advisor.
Today, this group of automated investment management companies — spawned, at least in part, by the financial crisis — is managing more than $50 billion in assets, with growth of more than 200% in 2015 alone, according to independent research firm Aite Group.
Needless to say, you’re probably aware of these guys now. There’s a good chance you’ve even put some money on the line. But is the robo-advisor you first chose still the right fit?
A period of rapid change
The robo-advisor industry of 2016 is not the robo-advisor industry of even a year ago.
Account minimums have fallen — twice, in the case of TradeKing Advisors. Features are now more competitive; Wealthfront recently launched a portfolio analysis tool, andBetterment just added account aggregation. Some companies have changed their fee structure; others are regularly launching new promotional offerings.
There’s also the chance that your favorite old-hat brokerage may have gotten in the game.Schwab Intelligent Portfolios and Vanguard Personal Advisor Services both had a big hand in last year’s growth. Fidelity has plans to launch a robo-advisor arm; Wells Fargo Advisors, Morgan Stanley and Bank of America have also indicated they have something in the works.
A chance at a freebie
The robo-advisor competition is so fierce that some companies are now offering their services for free. The aforementioned Schwab service charges no management fee, nor does WiseBanyan, another newer offering.
Are they free-free, like you won’t pay a dime free? No. The investments used still carryexpense ratios, as they do at any other advisor. And as you may have learned the last time you shopped at a discount store, there are trade-offs for a low price tag.
In the case of Schwab, the company holds a large percentage of its portfolios in cash — a minimum of 6% and, in some cases, up to nearly 30%, which is too conservative for many investors. WiseBanyan still feels new: Its account selection is limited — no joint accounts — and the service requires a waiting list to join. It also plans to offer certain features a la carte, which could add up quickly if you opt in.
Still, if cost is your No. 1 priority, these services are worth a look.
Larger account balances could mean lower fees
Perhaps the biggest change is on your end: You might actually be getting richer — if not through investment growth (after these last few months in the stock market, you’d probably laugh at that, if you didn’t want to cry) then maybe through regular deposits to your account.
With a bigger account, you may be able to cut fees. Some robo-advisors offer tiered pricing that lowers their fees as you invest more, such as Betterment, which charges:
- 0.35% on balances of $10,000 or less — or a punishing $3 a month on accounts in that range that don’t have automatic deposits of $100 or more.
- 0.25% on balances of $10,001 to $99,999.
- 0.15% on balances of $100,000 or more.
If you now qualify for that 0.15% level and you’re with an advisor that charges more — which is almost all of them, save the free services mentioned above — you might consider a move.
Taxable accounts benefit from tax optimization
If you’re the type to browse robo-advisor websites for fun, you may notice a lot of emphasis on tax optimization services, like tax-loss harvesting, which aims to offset capital gains by selling losing investments. But what the sites don’t make clear is that if you’re investing through an IRA, none of that matters to you. IRAs are tax-advantaged accounts, which means you don’t pay capital gains taxes on investments within them.
However, if you decide to open a taxable brokerage account, either because you’ve maxed out your IRA contribution for the year or you’re investing for something other than retirement, you might be interested in these services. If so, you’ll want to pay attention to which offers the best.
On smaller account balances, it might be a wash. But if your taxable-account balance is more than $100,000, the answer is often Wealthfront, which offers direct indexing on accounts of that size.
Direct indexing is kind of like tax-loss harvesting on steroids. Because it’s difficult to dial down to specific losses when investing in exchange-trade funds — as most of these robo-advisors do — Wealthfront replicates the ETF by directly buying the stocks the ETF holds. It can then single out individual tax-loss-harvesting opportunities and reinvest the tax savings. Personal Capital offers a similar service, albeit at a higher management fee of 0.89%.
Making a change
The funny thing about people is that they often move their money around when they shouldn’t — selling investments when the stock market is down, for example — but feel paralyzed with fear, of change and paperwork, when a move would actually be beneficial, as switching brokerages, banks or robo-advisors can be.
But changing your robo-advisor is relatively simple, and in most cases, it won’t cause much disruption to your current portfolio. For one thing, you’re unlikely to have a lot of bills and services linked to your account, which means you don’t have to notify Netflix and your gym about your new billing information. For another, these are robots. Simple and automatic is what they do.
Wealthfront is strong here too. The company touts its tax-minimized-account transfer service, which essentially incorporates compatible transferred assets — like ETFs that are part of its portfolio or large-cap stocks — directly into your new account, no need to sell anything. It will then sell assets with losses and long-term capital gains, and hold any assets with short-term capital gains until they go long-term, which happens at the one-year point. As it sells the assets, it incorporates the proceeds into your new Wealthfront portfolio.
Betterment says it, too, can transfer in securities that are supported in its portfolio. It doesn’t support progressive sales of securities over time, such as for non-ETF investments in taxable accounts, says Alex Benke, the company’s director of advice products.
Be aware of transfer fees
Finally, you should know that some companies, particularly brokerages, charge a fee to move money out of or to close your account.
That’s less frequent with robo-advisors but still worth noting. Betterment, Schwab, Wealthfront and Vanguard all say there are no fees to close or transfer an account. WiseBanyan customers are charged a transfer-out fee of $75 ($95 for IRA accounts) by the company’s clearing firm.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email:firstname.lastname@example.org. Twitter: @arioshea.
This article first appeared in NerdWallet.
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