Robo-Advisors That Completely Automate Online Investing

By Matt Krantz

If you’re comfortable with the idea of completely handing over your portfolio to a machine, there are completely autonomous Robo-Advisors that will pick your exchange-traded funds (ETFs) and actually buy them. These services are designed to completely automate the process of picking ETFs, buying them, and keeping them in balance.

There are some catches, namely the fees and the lack of control, but for beginning investors or people who want to hand the keys over to someone, they can be great options. Some examples include

  • Schwab Intelligent Portfolios isn’t the first turnkey Robo-Advisor, but certainly the one making the biggest impact. When one of the largest online brokers in the world – and one that caters to the do-it-yourself investor – unveils a Robo-Advisor, the world takes notice. Schwab’s system assesses your taste for risk and then builds a portfolio of up to 20 different asset classes. Even more stunning — the service is free. It doesn’t charge advisory fees or commissions. The service also helps you sell losers at tax time, giving you tax losses that can be used to cut your taxes.

    Does Schwab Intelligent Portfolios sound too good to be true? There are a couple of drawbacks. First, you’ll need to trust the machine’s selection of ETFs. But there’s a more important consideration — a hidden fee. One of the asset classes Schwab Intelligent Portfolios can choose is cash. That’s right, part of the money you’ve invested in the portfolio can be held in greenback, which you get absolutely no return on.

    Allowing cash to sit in your brokerage account collecting no interest or appreciating can be pretty costly. This is a hidden fee investors need to be aware of — and a big reason why you can still beat the Intelligent Portfolios by choosing your own investments.

  • CapitalOne Investing’s Portfolio Builder is another example of a model where an online broker recommends a portfolio and suggests specific ETFs that can work. Portfolio Builder recommends a portfolio of up to eight ETFs that fit your needs. You can then buy the entire collection of ETFs for a flat commission of $18.95. The system is appealing because you already have a relationship with the firm, and you don’t need to open an account.

  • Wealthfront is targeting investors who want to enjoy the benefits of ETFs, but want to leave most of the work to someone else. Simply answer a few questions on Wealthfront’s website, including how much you have to invest and your age, and the site not only will choose ETFs for you, but buy and manage them, too. But with this service comes a cost. Wealthfront will manage your first $10,000 for free. But if you ask Wealthfront to manage more than $10,000, the site takes a cut of your portfolio to the tune of 0.25 percent of your assets a year.

  • Betterment is another site trying to appeal to ETF investors who want someone else to choose their ETFs, and are willing to pay for the convenience. To use Betterment, you answer questions about your financial goals, and the site will create a collection of ETFs deemed to be ideal for you. The site will then buy and manage those ETFs for you. Depending on the size of your initial deposit, Betterment takes anywhere between a 0.15 percent and 0.35 percent cut of your portfolio a year as a fee.

These automated Robo-Advisors might seem pretty appealing. They can be a great solution if you’ve decided you’re not interested in managing your money yourself because you don’t have the time or interest. These Robo-Advisors are better than doing nothing — and if they urge you to get started they can be perfect. But you are probably more than a little interested in optimizing your return. And frankly, you can do better yourself.

Most investors can set up an account at a brokerage account with no-commission ETFs, buy the ETFs themselves, and save at least 0.1 percent a year, if not more. Robo-Advisors aren’t right for investors, either, who are looking for exposure to some off-the-beaten-path corners of the market, like the ones discussed later in this chapter.