Dawn of the FinTechs: Say Goodbye to Your Costly Advisor

Robo-Advisors

BettermentThere 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 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.

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 competent advisors regarding insurance, tax, and estate planning make sense to optimize your financial activities.

Your Advisor, The Bad News

Your advisor can’t predict the future. He knows where the markets are headed 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 i.e. 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 consultant. Some even rise to snake oil man statuses such as Bernie Madoff and Earl Jones.

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 index exchange-traded funds (ETFs).

Robo-Advisors

A robo-advisor (robo-adviser) is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human, financial planners. An investor fills out an investor profile-like questionnaire, deposits money; then her money gets invested in a handful of index funds, and rebalanced automatically. The basket of funds for two popular robo-advisors, Betterment and Wealthfront, derive from leading asset managers 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.

Let’s compare five robo-advisors who’ve gained traction including Betterment, Charles Schwab, Personal Capital, Wealthfront, and Vanguard Personal Advisor.

Betterment Charles Schwab Personal Capital* Wealthfront Vanguard PA
Pricing model Tiered Free Tiered Flat Flat
Account minimum $0 $5,000 $25,000 $500 $50,000
Account management fee 0.15% to 0.35% Free 0.49% 0.89% Free to 0.25% 0.3%
Tax-loss harvesting Yes Yes, but not automatic and on a client-by-client basis Yes Yes Yes, provided on a client-by-client basis
Financial advisor access No No Yes No Yes

*Personal Capital offers a couple of fantastic free tools to understand your portfolio better.

**ETFs incur their own expenses stated as a percent, for example, 0.21%. This is an additional cost to an account management fee.

Themed Investing

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 rebalance 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 ETFs, “motifs” are groups of up to 30 securities – usually researched and assembled by Motif staff – that are arranged around a theme, like 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 stocks.

Micro-Investing Apps

CoinsTo encourage millennials and newbies to invest, a couple of promising apps have entered the marketplace. 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 attractive 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.

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. Unlike Stash, Acorns sticks to 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 the same fees as Stash of $1 per month for accounts under $5,000 and 0.25% for above.

Discount Brokerages

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 my research. Also, I like trading stocks and options which I can’t do through robo-advisors.

Discount Brokerage Robo-Advisor
Product selection Wide Limited
Trade options Yes No
DIY friendly Yes No
Account management fee No Yes

TD Ameritrade (USA), TD Direct Investing (UK), and Questrade (Canada) are all platforms I recommend. Again, Motif Investing is a traditional brokerage as well, so they’re another option. Robinhood is a free stock trading app available to US, Australian, and Chinese citizens. Their app doesn’t come with many bells and whistles and investing activities are limited to their app, but free commission platforms are always worth exploring.

 

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