I started an experiment a year ago or so to compare a Robo-Advisor with traditional brokered investment accounts I’ve had for years and an initial verdict is in: The RA beat the traditional approach including a fund we have that only uses Vanguard ETFs. So, even if you “like” the broker you’ve been dealing with, a person who may have a conflict of interest with you (the better things work for him/her, the worse they work out for you in terms of transaction fees, 12(b)1 kickbacks, risk, and the like), you may want to consider transitioning to a RA.
I shopped around between several offering, including Wealthfront, Betterment, Wealthsimple, and others and settled on Wealthfront based on its balance of assets under management (the viability of this niche industry depends on low client acquisition costs and scale) and its ease of account establishment and low costs for initially small accounts.
All of these firms are built on the theory of modern portfolio theory which is only modern if one thinks of the 1950s as being “modern.” In any case, this approach to investing beats 94% of actively managed approaches and it’s not likely that our “normal folk” clients have access to those insider approaches.
An interesting angle for taxable investments is the tax loss harvesting feature that approaches, but doesn’t technically cross, the legal proscription against wash sale tax deductions. Wealthsimple’s algorithm (and those of several other RAs) places a buy order for a near peer security (in the age of ETFs, this isn’t hard) whenever it looks like there is a loss that isn’t going to recover timely. You’ll get to deduct the loss without actually leaving the market since the sale and buy take place in accordance with Internal Revenue Code provisions. Neat, huh?
Another feature we really liked was the up-front discussion of risk. These discussions take place in a RA environment with little of the hedging of a live investment manager who may be tempted to steer you toward investments that exceed your risk tolerance. The computer doesn’t have a personal stake in your game.
We’ll keep an eye on the phenomenon so you don’t have to. We intend to grow our personal Robo-Advisor holdings at the expense of traditional, actively managed holdings. At this point, it looks like the best aspects of several strategies and tools, combining the buy and hold strategy of MPF and dollar-cost averaging, with portfolio rebalancing to manage risk and tax-loss harvesting only a computer can achieve at the lowest cost.
We aren’t investment advisors and don’t want to be. That said, part of our game is helping clients to invest the money we save them on their taxes through our low fees and tax code expertise and the RA milieu looks like a winner to us.