There was a time when investment advisors (IAs) offered reasonable value, but now 99% of them no longer do. In fact, investors who still use IAs are throwing away good money after bad. IAs belong to an age of limited financial information, lack of online services and tools, and few options to invest wisely as a do-it-yourself (DIY) investor. All of these discussion points have been rectified since the mid-2000s with a plethora of financial technology (FinTech) companies now providing transparent and low-cost investing solutions for every type of investor. Whether you are starting out or have investable assets in the six or seven-figure range, there are more intelligent ways to invest than using an IA (especially bottom rung mutual fund salespeople).
If you insist on using an advisor, I recommend using an unbiased and objective fee-only advisor who abides by a fiduciary responsibility to his clients. Also, bringing on board qualified advisors regarding insurance, tax, and estate planning makes sense to optimize your financial activities.
Your Advisor: The Bad News
Your advisor can’t predict the future. He knows where the markets are going just as much as you (except he profits from your gullibility and ignorance). The best he can do is offer suitable recommendations based on your investor profile, e.g., your goals, risk tolerance, time horizon, etc.
Most advisors practice “suitability” as it relates to a standard of care, not fiduciary stewardship thus attracting conflicts of interest to the detriment of your returns. Sorry to be the bearer of bad news, but most IAs are more sales professional than they are savvy investment consultants. Some even rise to snake oil man statuses such as Bernie Madoff and Earl Jones.
Your advisor attracts a premium compared to the alternatives. Where does this premium come from? You, the client, pay for it through high, unjustified, and hidden fees. Year after year, you’ll end up with less (irrespective of how the markets perform) which doesn’t baud well for your future and financial goals.
What FinTechs Offer
FinTech companies blend both financial and technology disciplines to make personal finance activities less costly for their users, for example, TransferWise “disrupts” the foreign exchange market by offering low-cost currency conversion services. Wealth management FinTechs focus on the same by providing low-cost investing services and more intelligent portfolio management mainly through exchange-traded funds (ETFs).
A robo-advisor (robo-adviser) is an online wealth management service that provides automated, algorithm-based portfolio management with or without access to financial advisors (depends on the robo-advisor). An investor completes an investor profile-like questionnaire, deposits money; then her money gets invested in a handful of index funds which are usually rebalanced automatically. The basket of funds for two well-known robo-advisors, Betterment and Wealthfront, derive from leading asset managers such as Vanguard and BlackRock (iShares).
Robo-advisors make a lot of sense and are more convenient than dealing with advisor-client paperwork, meetings, and emails. Robo-advising removes the middleman and connects investors directly to market while eliminating relatively high advisor fees. Instead of paying 1%, 2%, or more to a traditional advisor, robo-advisor account management fees start at 0.25%.
What Should You Consider?
Similar to choosing an investment advisor, you want to evaluate robo-advisors based on some criteria.
- Fees: how much does the company charge? How much more/less do you get compared to the alternatives? How transparent are they? Is pricing easy to find and understand?
- Investment strategy/philosophy: passive or active? Preconstructed or tailored portfolios? How is tax-loss harvesting handled?
- Securities: what does the company invest in, e.g., ETFs, mutual funds, individuals securities, etc? How many asset classes are accessible?
- Advisory and client support: do you have to pay extra for advice? How are inquiries resolved? Will you have a dedicated advisor or various people assigned to your account?
- Extras: what else is included in your fee, e.g., investment plan, advisor access, annual meeting, etc?
- Client experience: is the dashboard user-friendly and easy to navigate? How does reporting look?
- Management team: can you easily find who is in charge and more information on leadership?
|Robo-Advisor||A/C Min||Management Fee||# of ETFs||Rating|
|Betterment||$0||0.25% to 0.50%||13||5|
|Wealthfront||$500||Free to 0.25%||ETFs & Stocks||5|
|Vanguard PA||$50,000||0.30%||ETFs & Mutual Funds||4|
|Wealthsimple||$0||.40% to .50%||10||4|
|Acorns||$0||$1/month to 0.25%||6||3|
|Personal Capital||$25,000||0.49% to 0.89%||ETFs & Stocks||3|
|Stash||$5||$1/month to 0.25%||ETFs & Stocks||2|
|Hedgeable||$1||0.30% to 0.75%||ETFs & Stocks||2|
|Robo-Advisor||TLH||What’s Unique||In One Word||Rating|
|Betterment||Yes||One-to-one relationship with a Certified Financial Planner (premium service).||Easy||5|
|Charles Schwab||Yes||No account, commission, or advisory fees.||Intelligent||5|
|Wealthfront||Yes||Will use individual securities to optimize tax-loss harvesting.||Excellent||5|
|Vanguard PA||Yes||Tailored portfolios and low-cost ETFs.||Proven||4|
|Wealthsimple||Yes||Americans and Canadians can invest.||Standard||4|
|Acorns||No||Purchase-driven investing. Amounts are rounded up, and the difference is invested.||Innovative||3|
|Personal Capital||Yes||For HNWI who want advisory services. Robust financial tools.||Sophisticated||3|
|Stash||No||Can invest based on goals and interests through “themes.”||Misaligned||2|
|WiseBanyan||Yes||Free to use and clients can pay for additional products and services.||Lacking||2|
|Ellevest||No||A goals-based investing approach with a personalized investment plan.||Overpriced||2|
|Hedgeable||Yes||Unique features such as “downside protection,” artificial intelligence, rewards, etc.||Confusing||2|
TLH = Tax-Loss Harvesting
*Personal Capital offers a couple of fantastic FREE tools to understand your portfolio better.
**ETFs incur expenses stated as a percent, for example, 0.21%. This is an additional cost to an account management fee.
Consider this scenario. Of all the funds out there, you want to build a portfolio of several stocks. However, you only have $25k to invest and to buy shares of each stock and rebalancing would be costly and inefficient. Given that your focus is on ten stocks, what do you do?
Motif Investing allows you to put your money into ideas without a lot of hassle or expense. They are “a trading platform built around you and your insights.” Similar in some ways to actively managed ETFs, “motifs” are groups of up to 30 securities – usually researched and assembled by Motif staff – that are arranged around a theme, e.g., social media small-cap stocks or companies. Additionally, you can create and customize your motif and invest in themes created by others. Currently, there are some cool sounding themes, for instance, Repeal Obamacare, Online Gaming World, and Drug-Patent Cliffs.
I like the idea of active investing through motifs because it’s an efficient and affordable way to build a portfolio. Also, Motif Investing doubles as a discount brokerage by allowing you to trade individual securities.
To encourage millennials and newbies to invest, a couple of promising apps have entered the marketplace. Acorns bills itself as a “micro investing” platform that invests your spare change. For instance, when you buy a cup of coffee for $3.53, Acorns will round up your payment to $4 and invest the difference of $0.47. Acorns uses five asset allocation models consisting of ETFs, for example, conservative through aggressive based on your investor profile. Their simplified investing approach is excellent for passive investors and investors who do want to be highly engaged in choosing investments. They charge $1 per month for accounts under $5,000 and 0.25% for above.
Stash lets you choose from a curated set of investments that are shown to you based on your investor profile. They offer a select group of investments based on factors like low fees, managed risk, and historical performance. Investment selections are mostly exchange-traded funds and some popular stocks. You can start with as little as $5, and they provide personalized guidance and recommendations, so you are not in it alone. They charge $1 per month for accounts under $5,000 and 0.25% for above.
Discount Brokerages for DIY Investors
With all the talk of FinTechs, discount brokerages still prove to be very useful for do-it-yourself (DIY) investors like me. I enjoy investing for the long-term and selecting ETFs based on research. Also, I like trading stocks and options which I can’t do through robo-advisors.
|Account management fee||No||Yes|
TD Ameritrade (USA), TD Direct Investing (UK), and Questrade (Canada) are all platforms I recommend. Robinhood is a free stock trading app available to US, Australian, and Chinese citizens. It doesn’t come with many bells and whistles, and investing activities are limited to their app.