In 2014, a New York Times writer opined that online wealth management services are perfect for people who “are halfway between an adventurous do-it-yourself investor and someone who needs in-depth guidance.”
Online wealth management services — often called robo-advisors or automated financial advisors — use computer models to automatically tailor portfolios to individual investors. These services also “advise” them on how to best to allocate their money, rebalance their portfolios, reinvest dividends and perform other managerial services that historically fell within the realm of human financial advisors. Online wealth management services collect basic information about investors — including their goals and tolerance for risk — and then create and automatically adjust portfolios based on that data.
The $4 billion in assets collectively managed by robo-advisors is minuscule in comparison to the $17 trillion wealth management market. But the industry is growing so quickly that the Wall Street Journal has speculated financial advisors could soon join travel agents and video store clerks on the “endangered list” as the most recent victim of online automation.
Online Wealth Management Services’ Pros and Cons
According to the Wall Street Journal, the central benefit of online wealth management services is cost. Investors can expect to pay around .4 or .5 percent for a robo-advisor. That comes out to around $40 or $50 on a $10,000 portfolio. Traditional advisors, on the other hand, charge fees that usually start at around 1 percent of assets. Plus, they often recommend higher-fee investments, which can erode earnings even further. Another major selling point is that online wealth management services generally accept clients who have much less to invest.
But there are drawbacks, as well. According to Forbes, robo-advisors don’t always offer the same level of flexibility when it comes to investing in individual stocks or exchange-traded funds that haven’t been pre-selected. Robo-advisors ask investors to fill out questionnaires to determine their own risk-tolerance level, which can lead to costly mistakes because “most investors don’t have a good sense of how much risk they can withstand,” one investor told The Wall Street Journal. Human advisors, on the other hand, can look for red flags and initiate discussions.
“Caveat emptor: buyer beware,” said Leslie Bocskor, managing partner at Electrum Partners and investment banker who worked in the online wealth management industry. “You don’t have a person on the other end of the phone saying, ‘You know, I don’t think that’s such a good idea. I understand why you want to do that, but maybe you don’t have all the information.’ The due diligence is all up to you. No one has fiduciary responsibility to look after your interests. You’re left entirely to your own devices. Your results may vary, and you have no one to blame but yourself.”
10 Best Wealth Management Services
The booming popularity of online wealth management services has led to a sometimes confusing proliferation of options for investors. This list of the 10 best choices is based on their size, ease of use, cost and features.
Betterment is among the oldest — and probably the most well known — names in the industry, and its services are aimed that the most novice investors. More than 90,000 investors manage more than $2 billion through Betterment, which offers financial planning, retirement planning, IRAs, trusts and tax-loss harvesting. Betterment charges a 0.15 percent fee for accounts with more than $100,000 and a 0.25 percent fee for accounts with between $10,000 and $100,000. For accounts with between $0 and $10,000, the fee is 0.35 percent with a minimum of $100 auto deposit, or it’s $3 a month. Investors enter some basic information and Betterment will design and implement a portfolio based on low-cost, global ETFs. It offers research resources and can be accessed from a desktop version, as well as apps for both iOS and Android.
Wealthfront manages more than $2.4 billion in customer assets. There are no trading fees and a flat advisory fee of 0.25 percent (don’t forget the ETF fee, which it says averages 0.12 percent). Investment minimum is $5,000, but Wealthfront is currently offering a promotion to manage your first $10,000 for free. Wealthfront goes for ETFs for most investors; it will buy individual stocks for those investing more than $100,000. Wealthfront has a desktop version and an iTunes app.
FutureAdvisor says it “manages your existing IRA, Roth, taxable accounts and other investment accounts. … If your accounts are already with Fidelity or TD Ameritrade, we’re simply a management layer you add over your existing accounts. If your accounts are elsewhere we do the paperwork to consolidate them at Fidelity or TD Ameritrade.” It evaluates those investments and advises them on strategies like diversification, taxes and fees. The fee for retirement planning is 0.5 percent of annual investable assets, but FutureAdvisor shines because its college planning and investment feature is free for both you and your dependent. Investments are managed by the FutureAdvisor Recommendations Engine, as well as a human investment team. Aside from a desktop version, FutureAdvisor also has a mobile app for Apple devices.
WiseBanyan stands out because of its price structure — there is none. Billing itself as “the world’s first free financial advisor,” WiseBanyan requires no account minimums and charges no fees to sign up, buy funds or hold them. The service instead makes money through add-ons such as tax-loss harvesting, and, of course, even the cheapest ETFs cost something to buy. In an effort to regulate flow and allow for a broker-dealer who uses people to open accounts, there is a wait list to join WiseBanyan. Everything from dividend reinvestment to rebalancing is automated, and users can access their accounts through the desktop version. The company does not yet offer a mobile app.
5. Motif Investing
Motif Investing is aimed at more advanced investors who are interested in actively trading individual stocks and other securities. The format involves more than 150 in-house investment baskets called “motifs” and more than 55,000 others created by users. Users pay $9.95 for a motif of up to 30 different stocks. More than 100,000 investors use Motif. It offers a desktop version, as well as apps for both Apple and Android mobile devices.
6. Personal Capital
Personal Capital manages more than $150 billion in assets of more than 700,000 customers. It stands out because an account comes with a human advisor who consults during setup and throughout the account’s life. Users can access it on iOS and Android mobile devices, as well as the Apple Watch and Amazon. The service is focused mostly on 401(k) management and is aimed at more seasoned investors. There are no trade commissions, but advisory fees are 0.89 percent for the first million dollars invested. That fee schedule drops incrementally to 0.49 percent for investors with $10 million.
MarketRiders, in operation since 2007, has built more than 15,000 portfolios valued at more than $5 billion. Its low-cost ETFs have an average fee of 0.2 percent, and its service is as low as $12.50 a month, with the first 30 days free. The service is compatible with any broker and claims to be able to lower fees by 80 percent. It offers both a desktop version and an app for iOS devices.
Hedgeable claims to offer “more account types than any other robo-advisor.” The service does not utilize third-party professionals, and users can access a live analytics platform. There are no account minimums, and fees range between 0.3 and 0.75 percent. Where applicable, Hedgeable accepts bitcoin for purchases and funding.
Covestor enables users to compare the company’s analysts and then mirror the investments made by their chosen professional. Users can invest in ETF-only, rebalancing core portfolios with fees between 0 percent and 1 percent with minimums of between $5,000 and $20,000. Actively managed satellite portfolios require an investment of between $10,000 and $500,000 and charge fees of 0.3 percent to 1.5 percent. Covestor qualified portfolios employ hedge fund strategies, come with performance and management fees and are only for those investing at least $500,000.
Acorns invests in a portfolio using your spare change. Acorns asks investors about their goals and risk acceptance, and the investor chooses a portfolio that includes ETFs and bonds. When an investor links his or her bank card, Acorns rounds up each purchase to the nearest dollar and puts that “spare change” into the portfolio. Investors can also deposit lump sums or recurring investments on top of their roundups. There are no minimums and no withdrawal fees, but the service costs $1 a month for accounts up to $5,000 or 0.25 percent for accounts with more than $5,000. There are apps for iOS and Android but no desktop version.
Tips for Choosing a Wealth Management Service
Forbes contributor Rob Berger recommends considering features that aren’t available from every online wealth management service, such as tax-loss harvesting, the ability to invest in individual stocks, the flexibility to choose ETFs that the online advisor might not have selected and SEP IRAs (for the self-employed). Also, understand how money is transferred before you sign up — some allow investors to house their money with well-known brokerages, while others require you to transfer funds to a third-party custodian.
So even though they’re all in the same business, these top online wealth management services vary in what they do, how they do it and what they charge. Which one fits your needs the best?