DIY Financial Management

Roderick Mann,

We wrote recently about “What Does a Financial Advisor Actually Do?” After reading through you may feel you can manage this task yourself if you have the access to tools and websites that can guide you. Today, you can get financial advice without a human advisor. That choice is made available through many firms known as robo-advisors.

Standalone robo-advisor firms use algorithm-based models for investing and financial planning. You will need first to define your objectives and goals, assess your risk tolerance, and then develop the planning and investment solutions that get you where you want to go.

Depending upon the complexity of your own financial situation, and if you have the time and resources to dedicate to your financial affairs, hiring a financial advisor may not be necessary, in which case you would save commissions and advisor fees!

Growth of robo-advisers

This year $1.8 trillion in robo-advisor accounts are spread across the globe, according to data from Statista Market Insights. Accounting firm PricewaterhouseCoopers (PwC), in a July 2023 report, projected global robo-advisory assets to reach $5.9 trillion by 2027. PwC believes that16% of wealth management firms will be out of business by 2027.

What are Robo-advisors

A robo-advisor uses algorithms, based on artificial intelligence (AI) and machine learning. It will design and even maintain your investment portfolio. Automated investing won’t take the control out of your hands, it will streamline the process for investors. Robo-advisors are essentially a melding of do-it-yourself investing and hiring a human financial advisor.

How it works

You start by answering a series of questions about investing goals, time horizon and your risk tolerance. The robo-advisor will guide you through the investment process and create a pro forma portfolio. That portfolio may consist of exchange-traded funds (ETFs), bond funds and other investments that align with your profile that was created.

How to open an account

Like any other brokerage account, investors can open a robo-advisor account taking these steps:

1.        Decide. Make the determination between your own investing skills, that of a financial advisor, or a robo-advisor.

2.        Choose. If you have decided on a robo-advisor, choose the firm you want to reach out and connect with. Most major brokerage firms offer automated investing platforms, but there are also online-only platforms that provide robo-advisor services.

3.        Apply: Submit your personal and financial information. Link your bank account and make your initial deposit.

4.        Profile: Robo-advisors will ask you to answer questions about your financial situation, your investing preferences, and the level of risk you can tolerate.

5.        Monitor: Check up on how your portfolio is faring, and whether your robo-advisor is making changes that you agree should be made.

Robo-advisors – advantage over traditional investing

Most people understand that to establish an investing portfolio they need to contact a brokerage firm, fund it, and finally pick the investments they think best in terms of their personal level of risk aversion and return expectations. They ask friends, colleagues and others for advice, and do their own online research before settling on their broker of choice. If they’re not comfortable with how to select investments, they hire a financial advisor.

Financial advisors are clearly going to be more personable than a robo-algorithm, even one designed with friendly AI-interactive features including cheerleading and congratulating as the Robinhood brokerage platform was designed to provide.

With large investments, the right financial advisor can span greater depth than the robo-advisor, as most also have experience beyond simply investing, and oninto the areas of tax, estate planning, insurance and other personal finance areas.

Robo-advisors use modern portfolio theory as the underlying foundation for their algorithms. This theory goes back almost 75 years to Nobel Prize winner Harry Markowitz. The theory is essentially geared toward seeking a maximum return on a given level of risk, but not on an individual investment level, instead, on the entire portfolio.

By mixing high and low-risk investments that are not correlated the investments won’t all move in the same direction at the same time. This is advantageous in that it provides diversification, and that is what robo-advisors are duplicating in their underlying algorithms and through their questionnaires.

As an example, a robo-advisory service might allocate a portion to stocks, another to fixed income, some to bonds and the balance to cash. Both domestic and global analysis, along with other differentiating criteria such as large and small businesses are all going to be subject to the programming of the algorithm. Brokerages then create separate ETFs based upon separate risk profiles and summary analysis resulting from answering their questionnaire.

Robo-advisor fees

While some firms do not charge management and advisory fees, most do. These fees can range from 0.15% to 0.50% or they might charge monthly subscription fees. Betterment charges $4/month but then switches to a 0.25% annual fee if you keep at least $20,000 in your Betterment accounts. Without management fees you will still be paying ETF fees based upon what’s in your portfolio. Looking again at Betterment, these can range from 0.05% to 0.21%. Additionally, you will find sometimes account minimums that can range from minor to several thousand dollars.

Summary

The best robo-advisory brokerage account can vary depending on your specific needs and preferences, but here are some top picks. Each of these robo-advisors has its own strengths, so it's important to consider factors like fees, investment options, financial planning tools, and any additional services you might need.

1.        Betterment: Mentioned above and my top choice, surveys generally rate it best overall. Betterment offers a user-friendly platform, only 0.25% annual fee, and access to financial advisors if needed.

2.        Wealthfront: State of the art financial planning, Wealthfront is ideal for those looking for comprehensive financial management. A similar fee structure as Betterment but includes some other features such as tax-loss harvesting.

3.        Vanguard Digital Advisor: This is marketed to high-net-worth investors, offering low fees and access to Vanguard's top-rated funds. It's a solid choice for those who want hands-off approach to investing.

4.        Finally, SoFi Automated Investing and Charles Schwab Intelligent Portfolios feature competitive rates, no account minimums and many investment options with no advisory feed.