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By Ian Salisbury
March 31, 2015
Peter Yang

New websites called robo-advisers are promising smarter investment advice at a much lower cost. But are you really
ready to give up the human touch?

Betterment looks like a startup right out of tech disrupter central casting. Its office, in an airy loft space, features a beer tap and Ping-Pong table. The founder, Jon Stein, favors open-necked shirts at work, not a suit and a tie. He is 35 years old.

But Betterment isn’t in Silicon Valley, and it’s not selling chat apps, cat videos, or cheap car rides. It’s in Manhattan and trying to make a splash in the very serious business of investment advice. Stein has a Wall Street résumé: He’s a former banking consultant and a chartered financial analyst. He also thinks that Wall Street charges way too much and that Internet-based companies can fundamentally change the way you invest for your retirement. “We’ve taken the friction out of the process. We’ve made [advice] accessible to everyone. That is the future,” says Stein, with the modesty you’d expect from a tech CEO.

What Stein calls “friction” other advisers call a good business. Advice can be expensive. You may pay about 5% off the top for a commission-based adviser who puts you in mutual funds. Or you might pay an annual fee—1% of assets is typical—but many advisers and planners often won’t bother with clients who don’t have a lot to invest. “It’s almost like there were two options: walking, or driving a Mercedes,” says Michael Kitces of Pinnacle Advisory Group.

Betterment and at least a dozen competitors, including Wealthfront and FutureAdvisor, think web tools and computer models can deliver advice much more cheaply. Known (sometimes pejoratively) as robo-advisers, they pick investments for you and monitor your portfolio. Many do it for 0.15% to 0.5% of assets a year and welcome tiny balances.

“Many financial advisers are going to get drummed out of the business,” says adviser Ric Edelman, a well-known industry figure. That’s a bold forecast: Robos manage $19 billion, a relative sliver. Charles Schwab alone runs $2.5 trillion.

Private venture capital investors are racing in—Betterment recently got a shot of $60 million. Using Betterment’s implied value as a yardstick, VCs think a robo may be worth about $30 for every $100 in client assets, vs. $3 per $100 for some traditional advisers. Robos “see themselves becoming the next Schwab,” says Grant Easterbrook, author of an industry report for the research firm Corporate Insight. “Based on the money they’ve gotten, the VCs believe them.”

A close look at what most robos do reveals a fairly cookie-cutter, if common-sense, investment approach—one many Money readers would feel comfortable doing themselves. And there are important things the services haven’t yet figured out how to do well.

Still, this could start to finally open up advice to a bigger chunk of middle-class investors, not just the wealthy. Even if robos aren’t for you now, you may soon benefit from the way they’re changing the business. Other sites, such as LearnVest and Personal Capital, are using technology to connect you to a human adviser or planner you just never happen to meet in person. Established players like Vanguard and, yes, the current Schwab are responding with their own low-cost offerings. (Schwab’s headline price: free.) The existence of the robo option puts pressure on everyone’s prices.

In other words, you don’t need to buy the Mercedes. “Now there are Kias. There are Fords,” says Kitces. “There are a lot more choices.” Here’s how those choices stack up today, and what they can do for you.

Peter Yang


Financial company web pages don’t usually win points for style. Big firms offer dozens of products, from stock trading to annuities, and their sites make sure you see a link to every single one.

By contrast, Betterment’s is clean. You’ll see a picture of a computer and a cup of coffee. You enter your age and your income. After a few questions about your goals and attitude toward risk, a pie chart appears. It recommends eight to 12 low-cost exchange-traded index funds passively tracking parts of the U.S. stock market, the bond market, and foreign stocks.

If you like what you see, you are offered help moving your money over from your existing manager or linking to your checking account for regular deposits.

Essentially, that’s it.

Wealthfront, a competitor based in Silicon Valley, works roughly the same way. If talk of robo-advisers conjures something like IBM’s chess-playing Deep Blue, or an artificial intelligence that can see around the stock market’s corners for you, the reality is more mundane. Most robos are putting you in investments you’ll hold for years, adjusting only for your age or when you change your goals. (They also do some trades to cut your tax bill, but that won’t matter much if you invest via an IRA.) Most don’t pick stocks and don’t try to find fund managers who will beat the market. By sticking with index funds charging an average of 0.15%, they keep underlying investment costs low.

Such simplicity isn’t bad. Indeed, arguably the biggest innovation driving many of these companies isn’t new technology but a previous intellectual revolution: the realization that most investors will be far better off buying and holding cheap index funds than paying someone to try to outwit the market. Over a recent five-year period, according to S&P Dow Jones Indices, 74% of domestic stock funds failed to beat a total-market index after their fees. Add in high fees or a commission for an adviser, and it’s even harder to keep up.

But indexing’s simplicity has a downside, the robo-advisers argue. Advisers selling mutual funds (or their own market-divination skills) don’t have much incentive to tell you to buy some cheap index funds and mostly leave them alone. The problem is not that savers need a fancier investing strategy. It’s that too many people—especially millennials just starting to save—don’t know about the simple good one that already exists.


Other investors may start out right but make mistakes like panicking during a downturn and selling out. Some just don’t want the hassle of setting up and adjusting their accounts over time. “We are for delegators,” says Adam Nash, chief executive of Wealthfront.

Wealthfront charges 0.25% of assets per year to delegate; Betterment is 0.15% to 0.35% of assets. If you add in the fees you pay on ETFs, that might top out at 0.5% for your whole investment portfolio. Lots of actively managed stock mutual funds, which don’t do a whit of financial planning for you, cost twice as much.

Of course, in-the-know investors can get something similar that’s even cheaper. An index-based target-date mutual fund will also give you a preset mix of stocks and bonds, and shift them as you age. Vanguard Target Retirement 2035, meant for an investor retiring in 20 years, has about the same stock/bond mix as Wealthfront recommends (see the chart at right). It costs less than 0.2%.

Robos’ index portfolios are a bit more fine-tuned than Vanguard’s. They’re tweaked to match your expressed risk tolerance, and Betterment, for example, thinks there’s a long-term edge to be gained by holding index funds that track value-priced stocks in addition to an all-market fund. Wealthfront adds commodities for diversification and a high-dividend stock fund for extra income.

In the end, it’s fair to say these are all price-competitive products, and what you prefer may be a matter of taste. A bigger issue for Betterment and Wealthfront is that there’s some money they can’t help you with—and it may be the bulk of your wealth.


Betterment and Wealthfront not only have low prices but also modest minimums. (Betterment actually has no minimum.) Yet as accessible as they want to be, they are still in some sense niche products. They skew young—with an average age of about 35, vs. 51 for the average mutual fund owner—and they don’t even try to address what’s in your 401(k). That means that they make sense only for people who don’t have a workplace savings plan, are doing so well that they have money to invest on top of one, or who have been able to roll over 401(k) money from a previous employer.

That’s a pretty big blind spot for an adviser. While Americans have $6.5 trillion in IRAs, there’s more than $16 trillion stashed in less flexible vehicles like 401(k)s and pensions, according to the Investment Company Institute.

Some other robo-advisers have been trying to crack that nut. But it’s a tough one, since employers have so much control over 401(k) options. “No one has really solved it,” says Chris Nicholson, head of communications at FutureAdvisor, another automated adviser.

FutureAdvisor’s answer so far is a free web tool that provides basic 401(k) analysis. You can give the company a password to your plan’s website, and it will look at your asset allocation and suggest some changes. (It says passwords stay encrypted and give them read-only access; if it can’t link to your plan’s site, you can enter your info manually.) Since FutureAdvisor doesn’t know your plan options, however, it can only suggest some index funds you might have access to in your plan.

The tool essentially provides a taste of what FutureAdvisor offers with its premium service (similar to Betterment and Wealthfront) for money outside your 401(k). It charges 0.5% a year on assets it invests for you.

Another company, Jemstep, has actually built a database of 401(k) plans and their options. Its web tool aims to give you specific trading instructions, which you execute yourself. You can get asset allocation advice free, but for the actual fund picks, it charges a flat monthly rate of $18 to $70, depending on your account size.

But perhaps illustrating how hard it’s been to make a dent in the 401(k) advice market, Jemstep has also started a product for traditional advisers who want to automate some of their work load. It’s the main thing you see when you go to its website now. You have to hunt around for its consumer tool.


Here are some other things a computer will still struggle to do: Help you think through whether you are truly ready to retire or to buy your first house. Or parse a really complicated financial question—one you might not even be sure how to ask. So other startups are pairing computer tools with human beings you talk to on the phone.

Personal Capital has a free, slick web tool that can analyze your 401(k), and like FutureAdviser uses that to pitch a money management service, but one with an adviser attached. (It’s relatively expensive in this group.) Other players aim to keep the tech in the background. Rebalance IRA, for example, works a lot like the other robos, using lowcost index ETFs, but starts the process with a phone consultation. “I am able to suss out what people are thinking and feeling,” says Eileen McPeake, a VP at Rebalance IRA who also works with clients. “You can provide a more nuanced take. Like, if you have a pension, put more in equities.”

LearnVest—which on March 25 announced that it was being acquired by financial services giant Northwestern Mutual—comes at advice from a different direction, starting with basic money planning (building an emergency fund, saving regularly, and making sure you have the right insurance) and getting to investing last. It lets you link accounts, from student loans to credit cards, so that you can see them all on one online dashboard. For a flat setup fee of $299 and then $19 a month, you’ll get to talk on the phone with a planner who sees your dashboard too. The planners can also discuss investment strategy. But they’ll focus on your broad asset-class mix, so you’ll make investments on your own at your own brokerage.

How expensive LearnVest is depends on how you use it. The first year of service at $500 works out to 0.5% of assets on $100,000 but 0.25% of $200,000. If you use LearnVest only for a few months to get started, it’s even less.


The industry’s incumbents won’t give up their trillion-dollar businesses without a fight.

Index fund giant Vanguard has a pilot program, Personal Advisor Services, that combines investment and budgeting web tools with over-the-phone access to advisers. It’s open to Vanguard clients with more than $100,000 to invest, but the company hopes to lower the minimum to $50,000 this year. It charges 0.3% of assets per year.

Schwab’s new Intelligent Portfolios service, which launched at the beginning of March, sounds a lot like Betterment. It will charge no added fee, although it will use some Schwab-run cash vehicles and ETFs (as well as third-party ETFs), so it will still generate some revenue for Schwab.

Cerulli Associates analyst Scott Smith thinks Schwab won’t be the last traditional adviser to jump in with an automated option. “Every big player will have something,” he says. But they might be limited in how far they can go. Smith adds, “They aren’t going to go to their existing customers and say, ‘Hey, we know you like what you’ve got, but how about this cheaper thing?'”

Perhaps no firm better exemplifies this conundrum than Fidelity. It’s kept a hand in the robo game, for example announcing last year that it would make Betterment web tools available to Fidelity-affiliated advisers. But it’s not yet offering its own cheap Betterment-like service. Fidelity already has a $137 billion business—seven times that of the robos combined—called Portfolio Advisory Service. It charges an average 0.8% of assets a year (smaller accounts pay more), uses phone-based advisers, and invests with active managers as well as in index funds.

Robos aren’t ready to kill that business just yet. Today they are best-suited to people with an early-adopter mentality, who are comfortable using web tools to drive big financial decisions, yet don’t want to go purely DIY. Still, advisers in general are being challenged to up their game. “Charging 1% to put people into mutual funds isn’t going to cut it,” says Tadas Viskanta, editor of investing blog Abnormal Returns. Even if robos aren’t perfect, good advice at a rock-bottom price suddenly doesn’t seem like too much to expect.