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Published: Jul 27, 2016 7 min read
A pedestrian walks past a stock ticker at a Fidelity Investments office in Boston, Massachusetts, July 31, 2013.
A pedestrian walks past a stock ticker at a Fidelity Investments office in Boston, Massachusetts, July 31, 2013.
Brian Snyder—Reuters

Fidelity is the latest big firm to roll out an automated investing service, raising the question: Should you sign up for a so-called robo-adviser?

Since arriving on the scene in 2008, these online wealth management services have aimed to democratize financial advice by offering investing help that is cheaper and easier to access than that of their human counterparts.

A robo could be right for you if you don't have complex financial planning needs and are comfortable getting investment service online.

Fidelity Go, launched Wednesday, resembles competitors Betterment, Wealthfront and Schwab Intelligent Portfolios in providing a simple, online interface and using an algorithm that takes into account an investor’s age and risk profile to assemble a suggested investment portfolio.

The minimum investment required for the Fidelity service is $5,000. Fidelity Go customers pay an all-in-one cost of 0.35% annually on tax-deferred retirement accounts. That's roughly $1.46 a month for a $5,000 investment. The all-in-one fee is about 0.40% on taxable accounts. The cost covers the advisory service and the cost of the investment products, which include a mix of Fidelity index funds and BlackRock exchange-traded funds.

While independent companies Betterment and Wealthfront were the early leaders in robo advice, the big news over the past 17 months has been the entry of financial-services giants including Charles Schwab and Fidelity. Measured by the dollars being managed, Vanguard has quickly become the biggest player in the robo space, but its Personal Advisor Services (launched in May 2015) combines online service with assistance from human advisers. Meanwhile, brokerages including UBS and LPL Financial have announced online services for their armies of advisers to use in working with clients.

The entry of large companies including Fidelity is "an enormous shift" in the robo-advice business that could lead to a big jump in usage, says William Boland, a senior analyst focusing on the wealth management industry at research firm Aite Group. "The startups, the Betterments and Wealthfronts, have been critical. But once you’re seeing the big firms move, with new advertisements and offers to the thousands of existing clients, that’s validation and it will start to pop.”

Despite the many robo-advice services now in business, they serve only a small fraction of the market. In fact, only 45% of investors with portfolios of $10,000 or more have even heard of this emerging technology, according to a survey released Tuesday from Wells Fargo. And far fewer, just 5%, have actually used a robo-adviser.

At the end of last year, robo-advisers had $53 billion under management, according to Aite. That includes assets at Vanguard, which had just over $30 billion at the end of 2015. Aite expects assets controlled by these platforms to jump to $285 billion by next year.

“It will take a little time for people to get comfortable with these solutions,” says Rich Compson, head of Fidelity’s retail managed accounts business. “The fact that they’ll be out there by more name brands that investors know, understand and trust—that will really drive the adoption.”

Finding an Audience

The target for Fidelity Go is younger investors (ages 25 to 45) who don't have complex needs that require a regular adviser or maybe who can’t afford that adviser, Compson says.

To benefit from a robo service, one key is being comfortable with interacting digitally, Compson says. Investors who are looking for a one-on-one relationship or those who need additional hand-holding are probably not best-served by a robo. The new Fidelity Go, as well as Betterment, Wealthfront and Schwab’s Intelligent Portfolios, offer only limited human interaction, usually in the form of live chat and call centers.

Also, some investors may find the typical robo solutions too basic, particularly if they are interested in actively managed funds or those with hedge-fund-like strategies. Similarly, if investors are keen on a specific area, like socially responsible investing, Boland says they may fare better without a robo-adviser. And those who are interested in timing the markets and day-trading should also consider other investing avenues, as robo-advisers are generally designed for long-term investing and saving.

Robo or Target-Date Fund?

Perhaps the investment option most similar to robo-advisers is target date funds. Both are generally geared toward people, including first-time investors, looking for a simple solution to long-term investing for retirement.

With target date funds, the investor selects a fund based on his or her projected year of retirement. Generally, these funds take more investment risk when investors are younger and then gradually pare down the risk level as holders grow closer to retirement age--a changing allocation known as a fund's glidepath.

Robo advisers say their services offer a higher degree of personalization. “If you’re stuck on the one-size-fits-all glidepath in a target date fund, unfortunately your individual needs don’t matter,” robo-adviser Betterment wrote in a recent blog post.

Depending on where you are investing, you may not have a choice between a robo and a target date fund. Target date funds are commonly offered in 401(k) plans, while most of the automated investing services don’t manage those investments.

Target date funds can, on average, be more expensive than the typical robo offerings. Target date funds carry an average expense ratios of 0.73%, according to Morningstar research released in April. The figure is 0.55% when adjusted to reflect the market share of various fund providers.

Compare the charges on any specific funds and robo services you are considering. At Vanguard, target date funds come in at an average of 0.13%, while the human/robo advice service averages a 0.36% cost (including advice and investment products).

If you are investing outside of a 401(k), you’re comfortable with digital solutions and you need an easy-to-use investment option, it may be time to check out a robo-adviser.

“As that younger demographic continues to age, invest more and take on different life goals, I think you’ll see these robo offerings bloom even further,” Compson says.