When it's time to change robo-advisers
Five years ago, you probably hadn鈥檛 even heard the term听.
Today, this group of automated investment management companies 鈥� spawned, at least in part, by the financial crisis 鈥� is managing more than $50 billion in assets, with growth of more than 200% in 2015 alone, according to independent research firm听.
Needless to say, you鈥檙e probably aware of these guys now. There鈥檚 a good chance you鈥檝e even put some money on the line. But is the robo-advisor you first chose still the right fit?
A period of rapid change
The robo-advisor industry of 2016 is not the robo-advisor industry of听even a year ago.
Account minimums have fallen 鈥� twice, in the case of听. Features are now more competitive;听听recently launched a portfolio analysis tool, and听just added account aggregation. Some companies have changed their fee structure; others are regularly launching new promotional offerings.
There鈥檚 also the chance that your favorite old-hat brokerage may have gotten in the game.听补苍诲听听both had a big hand in last year鈥檚 growth.听听丑补蝉听听a robo-advisor arm; Wells Fargo Advisors, Morgan Stanley and Bank of America have also indicated they have something in the works.
A chance at a freebie
The robo-advisor competition is so fierce that some companies are now offering their services for free. The aforementioned Schwab service charges no management fee, nor does听, another newer offering.
Are they free-free, like you won鈥檛 pay a dime free? No. The investments used still carry, as they do at any other advisor. And as you may have learned the last time you shopped at a discount store, there are trade-offs for a low price tag.
In the case of Schwab, the company holds a large percentage of its portfolios in cash 鈥� a minimum of 6% and, in some cases, up to nearly 30%, which is too conservative for many investors. WiseBanyan still feels new: Its account selection is limited 鈥� no joint accounts 鈥� and the service requires a waiting list to join. It also plans to offer certain features a la carte, which could add up quickly if you opt in.
Still, if cost is your No. 1听priority, these services are worth a look.
Larger account balances could mean lower fees
Perhaps the biggest change is on your end: You might actually be getting richer 鈥� if not through investment growth (after these听, you鈥檇 probably laugh at that, if you didn鈥檛 want to cry) then maybe through regular deposits to your account.
With a bigger account, you may be able to cut fees. Some robo-advisors offer tiered pricing that lowers their fees as you invest more, such as Betterment, which charges:
- 0.35% on balances of $10,000 or less 鈥� or a punishing $3 a month on accounts in that range that don鈥檛 have听automatic deposits of $100 or more.
- 0.25% on balances of $10,001 to $99,999.
- 0.15% on balances of $100,000 or more.
If you now qualify for that 0.15% level and you鈥檙e with an advisor that charges more 鈥� which is听almost all of them, save the free services mentioned above 鈥� you might consider a move.
Taxable accounts benefit from tax optimization
If you鈥檙e the type to browse robo-advisor websites for fun, you may notice a lot of emphasis on tax optimization services, like听, which听aims to offset capital gains by selling losing investments. But what the sites don鈥檛 make clear is that if you鈥檙e investing through an听, none of that matters to you. IRAs are tax-advantaged accounts, which means you don鈥檛 pay capital gains taxes on investments within them.
However, if you decide to open a taxable听, either because you鈥檝e maxed out your IRA contribution for the year or you鈥檙e investing for something other than retirement, you might be interested in these services. If听so, you鈥檒l want to pay attention to which offers the best.
On smaller account balances, it might be a wash. But if your taxable-account balance is more than $100,000, the answer is often Wealthfront, which offers direct indexing on accounts of that size.
Direct indexing is kind of like tax-loss harvesting on steroids. Because it鈥檚 difficult to dial down to specific losses when investing in听鈥斕齛s most of these robo-advisors do 鈥� Wealthfront replicates the ETF by directly buying the stocks the ETF holds. It can then single out individual tax-loss-harvesting opportunities and reinvest the tax savings.听offers a similar service, albeit at a higher management fee of 0.89%.
Making a change
The funny thing about people is that they often move their money around when they shouldn鈥檛 鈥� selling investments when the stock market is down, for example 鈥� but feel paralyzed with fear, of change and paperwork, when a move would actually be beneficial, as听, banks or robo-advisors can be.
But changing your听robo-advisor is relatively simple, and in most cases, it won鈥檛 cause much disruption to your current portfolio. For one thing, you鈥檙e unlikely to have a lot of bills and services linked to your account, which means you don鈥檛 have to notify听Netflix and your gym about your new billing information.听For another, these are robots. Simple and automatic is what they do.
Wealthfront is strong here too. The company touts its tax-minimized-account transfer service, which essentially incorporates compatible transferred assets 鈥� like ETFs that are part of its portfolio or large-cap stocks 鈥� directly into your new account, no need to sell anything.听It will then sell assets with losses and long-term capital gains, and hold any assets with short-term capital gains until they go long-term, which happens at the one-year point. As听it sells the assets, it incorporates the proceeds into your new Wealthfront portfolio.
Betterment says it, too, can transfer in securities that are supported in its portfolio. It doesn鈥檛 support progressive sales of securities over time, such as for non-ETF investments in taxable accounts, says Alex Benke, the company鈥檚 director of advice products.
Be aware of transfer fees
Finally, you should know that some companies, particularly brokerages, charge a fee to move money out of or to close your account.
That鈥檚 less frequent with robo-advisors but still worth noting. Betterment, Schwab, Wealthfront and Vanguard all say there are no fees to close or transfer an account. WiseBanyan customers are charged a transfer-out fee of $75 ($95 for IRA accounts) by the company鈥檚 clearing firm.
Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website. Email:aoshea@nerdwallet.com. Twitter:听.
This article first appeared in 听
