If you are just starting to dabble in investing, have a small portfolio or if your investment needs are simple, there is a way to get professional advice for less cost than hiring an adviser.
Meet the robo adviser.
With robo investing, sophisticated computer software chooses your investment mix and automatically rebalances your portfolio, based on your goals. It’s a strategy that falls somewhere between the do-it-yourself model and hiring a financial planner.
Charles Sachs, a certified financial planner with Private Wealth Counsel in Miami, said robo-investing does for personal finance what TurboTax does for tax preparation — it’s free or low cost, and serves a population whose needs are not complex.
“Hiring a financial adviser may not be feasible if you’re just starting out, or if you have a portfolio below a certain dollar amount,” he said.
Companies such as Betterment, WealthFront, WiseBanyan, Personal Capital and FutureAdvisor offer robo-investing services. Brokerage houses like Charles Schwab and Vanguard also offer computer-assisted models. The cost can range from free for portfolios of a few thousand dollars to .15 to .5 percent of your assets annually, depending on your portfolio size and needs. Hiring a personal financial adviser to manage your assets can cost 1 percent of your assets or more per year.
Here is how it works: You typically fill out an investor profile with your current asset mix and goals, and the robo adviser will tell you what it recommends. Some robo advisers will manage the mix of your existing investments and make recommendations, said Larry Ludwig, founder of www.investorjunkie.com. Some require you to convert your assets to a preselected mix of exchange-traded funds (ETFs). Others will give a big picture assessment of all your assets, regardless of where they are held.
Computer models can handle duties such as dividend reinvesting, rebalancing, tax-loss harvesting and asset allocation.
“The market they are targeting is a market that has been ignored for years — that’s people with under a $500,000 net worth,” said Ludwig, of New York. “This is more for the beginner investor … someone who needs help and just doesn’t know where to go in terms of asset allocation.”
Companies like Betterment, WealthFront and Charles Schwab are a self-contained loop. You have to import your assets over to their service, he said.
“Say you have a 401(k) or IRA somewhere else. You’d move it to Betterment, then Betterment will do the asset allocation for the portfolio you have with them,” Ludwig said. On the other hand, Personal Capital is a more of a tech-assisted adviser, “meaning they can work with any firm you currently have and manage those assets. It’s more of a big-picture look,” he said.
Moving assets in taxable accounts could trigger tax consequences, but that may be the cost of getting you on track to meet your financial goals, Ludwig said.
How does this approach differ from setting up a target retirement account, which automatically adjusts your investment mix as you age? There is more personalization and flexibility with a robo adviser, Ludwig said. “They’re similar, but not exact. With Betterment, you can dial in what type of overall portfolio you want in terms of what your needs are. ... A target fund automatically adjusts, regardless of your big picture,” he said.
It all depends on how comfortable you are in the investment landscape.
“With a target fund, it’s a little more do-it-yourself. If you feel you have the knowledge and capability to do it yourself, and it’s cheaper, then that’s the way to go,” Ludwig said. On the other hand, “a lot of people need advice, but don’t have the assets under management to go to a financial advisor, so [a robo adviser] is a way to get these services.”
Sachs said to shop around and to read the fine print. “You have to understand what they’re doing, how it works and what you will be charged,” he said. “But the fact that one can now go to a self-serve model and get a very well-designed, put-together portfolio at very low cost is a great benefit.”
Later, if your financial situation gets more complicated, if you get an inheritance or need a trust to leave assets for heirs, you may be better served with a financial planner, Sachs said.
“Just be cautious about outgrowing this [robo advisor] approach,” he said. “If you start developing complexities in your life, consult a financial planner. There is more to financial planning than asset management.”