As a grad student, Henry Rubin didn’t spend much time contemplating retirement. It felt a million years away.
The Washington, D.C. transplant had minimal student and credit card debt, and was above water, but not saving any noticeable amount each month. Rubin had a modest stock portfolio with an investment bank that his parents had set up.
It took the urging of a close friend to push Rubin into planning sooner rather than later or suffer the consequences in his Golden Years.
“My friend works at a bank,” Rubin explains in an email conversation, “and said that not getting compound interest now was going to screw me down the road. He told me I needed to start retirement planning ASAP.”
Few 26-year-olds are planning for retirement. Few people under the age of 30 plan for a long weekend, let alone contemplate life over the age of 60. According to The Motley Fool, “45% of Americans have saved nothing for retirement, and 38% don’t actively save for retirement at all. One of the main factors in the procrastination of planning for old age is the thought of sitting down with a financial planner to discuss investment strategies, portfolios and all of the other financial jargon that causes most people’s eyes to gloss over in a haze of confusion and boredom.
Artificial intelligence is vacuuming homes on command and driving cars. Robots are even replacing humans in the bedroom. So why wouldn’t AI be a fast growing option for investing money? Rapidly advancing technology in the finance sector is one place where we might all be cool with the idea of robots taking over.
Rubin signed up for an account with robo-advisor Betterment after discussing all of the options with his friend.
Robo-advisors are a relatively hands-off way for people to manage investments. Also known as automated investing or online advisors, robo-advisors use computer algorithms and comprehensive financial software to provide investment services to customers. Most attractive to users is the fact that robo-advisors often require little to no human interaction.
Another selling point for robe-advisors like Betterment and Wealthfront is transparency. There’s no longer waiting for a financial advisor to return a call or answer an email.
“With robo-advisors, you can also invest online, anytime,” explains Kalen Holliday. Holliday is a director at the robo-advisor firm Interactive Brokers Asset Management. “If you have young kids to tend to during the day or work in an office surrounded by coworkers who you don’t want knowing you’re taking time off during the day to invest, investing online is better than having to call your broker between 9 AM and 5 PM. You can go online anytime and see how your investments are performing. With most mutual funds, customers have to wait for a quarterly report that’s outdated by the time it hits your desk.”
Wealthfront vs. Betterment and all the rest
There are several robo-advisor choices available, but Betterment and Wealthfront rose to the top of the heap. These two companies continue to lead when the pack, but which robo-advisor is better? Well, it depends on the individual but here’s how the two break down.
Both companies started with similar investing models. Both require no minimum investment and or minimum balance and both charge an annual fee for the service of .25% for managing a digital portfolio. Wealthfront offers free management of up to $10,000 worth of your account balance which means Wealthfront will usually always be the lower cost option. Betterment offsets this advantage by waiving management fees if your account balance is higher than $2M dollars.
Betterment offers one service that Wealthfront decided to eliminate early on — human advice. Wealthfront is 100% robo-advising while Betterment offers the option of also speaking with a financial advisor about investing options. Users are charged a .25% fee to consult with Betterment’s financial team via a messaging app on the website. Consultants will respond in about one business day. For a fee of .40% yearly, and a minimum $100,000 balance, Betterment customers can speak with advisors on the phone at any time.
For a deeper dive into both companies, check out this breakdown from the people over at NerdWallet.
Robos = Risk?
Other key advantages to a robotic advisor making money moves including automatic portfolio rebalancing and tax loss harvesting but there are numerous drawbacks and risks involved when computer algorithms do most of the thinking. Particularly in a fluctuating market.
“I found that some clients under retirement age took money out of IRA accounts when they shouldn’t have,” explains Bijan Golkar, the CEO of FPC Investment Advisory. “I also noticed that some clients had wash-sales come up when they took funds out since the account would just do a simple rebalance instead of looking at a client’s total picture.”
“The recent rise of robo advisors has occurred in the bull market that began in 2009,” says Robert Johnson, President, and CEO of The American College of Financial Services. “In bear markets, people tend to panic, make emotional decisions and exit markets – particularly equity markets. Left to their own devices, individual investors tend to ‘buy high and sell low.’ I believe the real test of robo-advisors will come in a prolonged bear market.”
Rick Frisbie, CEO of RobustWealth, a digital wealth platform for financial advisors, added another drawback of robo-advisors.
“Robo-advisors have many different services embedded in their platforms to help advisors run their practices. However, their core offering is the automatic rebalancing and trading algorithms that seek to keep clients within their goal and risk-based asset allocation frameworks. When there is ‘drift’ above-or-below the intended allocations to specific asset classes, the robo looks to rebalance the overall portfolio back in line with the clients’ expressed investment objectives.”
Every financial consultant we spoke to for this article had the same advice for Millennials — Choose the option that works best for their particular situation and finding a manageable combination of both human and robot for financial guidance isn’t a bad idea.
“I had a financial advisor before signing up for a Betterment account,” adds Rubin, “and I still consult with him from time to time. I just keep them separate.”