The Full Spectrum of Financial Advisors

spectrum2Do you recommend Wealthfront? Betterment? WiseBanyan? Schwab Intelligent Portfolios? Vanguard Personal Advisor Services? The upstarts like to bash on the competition, making it seem like they are your digital savior while everyone else is evil. The truth is that they are more similar than different.

Morgen Beck Rochard of Origin Wealth Advisors recently created the helpful infographic below on the wide range of possibilities you can get when you hire a “financial advisor”. Found via The Big Picture. Click for full source image.

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What does it mean? The term “financial advisor” tells you nearly nothing about:

  • Their level of training or years of experience.
  • The type of investment products that they sell (individual stocks, active funds, passive ETFs, whole life insurance, complicated annuities?)
  • How they are compensated (flat fee, percentage of assets, commissions).
  • Whether they are a fiduciary (legally required to always act in the client’s best interest)

Wealthfront, Betterment, WiseBanyan, Schwab Intelligent Portfolios, and Fidelity Go are all in the space of “Fee-only Passive Management” near the top. They are all Registered Investment Advisors (RIAs), which amongst other things are fiduciaries legally required to act in your best interest. They all manage a diversified portfolio of low-cost, passively-managed funds. They all charge a fee based on assets managed. They all provide limited financial planning, mostly using software with inputs that you adjust yourself.

Avoid everything below! Stay away from the yellow, orange, and red boxes. Complicated universal life insurance and equity-indexed annuities. Expensive mutual funds with expense ratios of 1% or higher. Using the principle of inversion, by simply avoiding these products you’re already doing above-average (with below-average fees).

Meanwhile, at the very top is what I cynically call “unicorn land”. Who doesn’t want a qualified human advisor that puts your interests first, provides comprehensive financial planning, and charges a reasonable fee? The paradox we get is that if a high-touch human financial advisor is good at what they do, chances are that they won’t look at your account unless you have over $1 million. Also, they tend to be more expensive. Looking at the Form ADV of Origin Wealth Advisors for example, over 75% of clients are “high net worth” and the portfolio management fee is 1.5% annually unless you have more than $5 million. There is nothing wrong with targeting high net worth clients and charging a premium fee for premium service. A human advisor that keeps you on course and prevent market timing or panic selling could create “advisor alpha“. But 1.5% annually is expensive, any way you cut it.

There are qualified, reasonably-priced human advisors out there, but you won’t find them on every street corner. In contrast, anyone with $500 can click on over the Betterment or Wealthfront and get a solid portfolio built and rebalanced regularly for them. At 0.25% annual fee, a $100,000 portfolio will cost $250 a year. Most people don’t even have $100,000 saved up.

If I had to start all over from the beginning, I’d probably do this. First, save up cash until you get $1,000. Then buy and keep investing in a Vanguard Target Retirement mutual fund. At the same time, learn about investing, behavioral psychology, and market history. Read, read, read. Then manage my own portfolio. But that’s not for everyone.

If you can keep putting money into your Target Retirement fund even during market panics with no other authority figure (robo or human) to help you out, then you could just keep your money there indefinitely. Give it a decade or three, and it will work fine. If you want to hire a low-cost robo-advisor to manage your portfolio, that will also work fine (if you also let it be). The more complicated robo-portfolios might create a slightly-higher risk-adjusted return, and automated tax-loss harvesting could offset part or all of the advisory fee. Remember that you are picking between different shades of blue on the above spectrum. You’re doing pretty good. Don’t become a victim of paralysis by analysis. The enemy of a good plan is a perfect plan.

Betterment Review 2017: Updated Features List

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Betterment is one of several automated portfolio managers that will manage a diversified mix of low-cost index funds and help you decide how much you’ll need to save for retirement. We’re still in the early stages of this “robo-advisor” evolution, with new features announced every few months. Here is an updated feature list for Betterment along with my commentary.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Large Value, US Mid Value, US Small Value, International Developed, Emerging Markets, US Corporate Bonds, US Total Bond, Inflation-Protected Treasuries, Muni Bonds, International Bonds, and Emerging Market Bonds. Primarily low-cost Vanguard and iShares ETFs are used.

Betterment has a more pronounced tilt towards the size premium and value premium than portfolio that tracks the traditional cap-weighted market. You could argue the finer points of whether this will really create higher risk-adjusted returns, but overall it is backed by academic research. As long as you can stick with it during bear markets, I think it will work out fine.

Retirement planning software with external account balances. RetireGuide is Betterment’s retirement planning software, launched in April 2015. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your balances without having to manually input them. According to their methodology guide, they don’t analyze your transactions to estimate savings rate, they are just pulling in balances.

How much do I have invested elsewhere? Am I saving enough money? How much estimated income will I have in retirement? Your future Social Security income is estimated for your based on your chosen retirement age and birthdate. You can change many of the variables as you like. Screenshots below:

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Account types. Betterment now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, SEP IRAs, and Inherited IRAs.

Tax-efficent asset location. They will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. In addition, if you have multiple types of accounts at Betterment (i.e. both IRA and taxable), it will manage multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs). Note that this only works across accounts that are held at Betterment. It does not adjust for non-Betterment accounts. This is called their Tax-Coordinated Portfolio.

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Daily tax-loss harvesting. Betterment’s “Tax-loss Harvesting+” software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Betterment side of things in their whitepaper. Here is an outside viewpoint arguing for more conservative estimates.

In the end, I do believe there is long-term value in tax-loss harvesting (and I do think daily monitoring can capture more losses) but it’s probably wise to use a conservative assumption as to the size of that value. (Now, you can perform your own tax-loss harvesting as well on a less-frequent basis. I do it myself as there is value, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it were free.)

Invest your excess cash automatically. Automatic contributions are good, but perhaps you don’t want to commit to a set amount each month. (Ideally, you do commit to a set amount, and this service invests more money on top of that.) Called SmartDeposit, you link your checking account and choose your Checking Account Ceiling and Max Deposit amount. If your checking account balance goes above the ceiling, Betterment will automatically sweep over money and invest it for you. Betterment will account for future scheduled deposits so you don’t over-contribute.

Fee schedule, including tiers with human financial planning advice. In January 2017, Betterment announced a fee structure change that included premium tiers with access a pool of human advisors. Here is a summary of the new plans:

  • Betterment Digital. Their original product with digital portfolio management and guidance. Now at a flat 0.25% annually (no more tiers). No minimum balance. There is no longer be a $3/month fee if you don’t make monthly auto-deposits. The management fee on any assets over $2 million is waived.
  • Betterment Plus. Digital features above + unlimited e-mail access + an annual planning call from a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” The plan is a flat 0.40% annually. $100,000 minimum balance required.
  • Betterment Premium. Digital features above + unlimited e-mail access + unlimited phone access to a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” The plan is a flat 0.50% annually. $250,000 minimum balance required.

(Betterment’s previous fee structure for Digital was 0.35% for balances under $10,000 with $100/mo auto-deposit (or a flat $3 a month without), 0.25% for balances of $10,000 to $100,000, and 0.15% for balances above $100,000. This means that with the new flat 0.25% fee structure, people with balances under $10k will end up paying less while those with $100k+ will be paying more after this change. Those customers with $100k+ were understandably upset at receiving a price hike. Existing customers on the 0.15% tier will stay on that fee structure until June 1st, 2017.)

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Summary. As a DIY investor willing to do most things myself, my thoughts on robo-advisors have often focused on weighing their feature set vs. the additional advisory fee. I don’t like the idea of giving up control, but I find myself keeping track of each improvement in their software capabilities.

In terms of comparing with other robo-advisors, Betterment has recently added the following features: Retirement planning software that syncs account balances from external accounts, tax-coordinated portfolio (when you have both IRA/401k and taxable at Betterment), access to human financial advisors at additional cost, and SmartDeposit which automatically invests excess cash from your checking account.

Current new customer promotions. From March 1st to April 18th, new customers who deposit at least $100,000 into a taxable Betterment account will receive a free Canary home security device ($199 retail). Offer excludes tax advantaged accounts such as IRAs and 401ks.

Wealthfront Review 2017: Updated Features List

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Fundrise Income eREIT Review 2017: One Year Update

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High-Cost Index Funds and Low-Cost Actively Managed Funds

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More Experience = Less Complexity?

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