Algorithms. That was once a word avoided in your high school math class yet now it is coveted and treasured. Whether it be high frequency trading or some other groups using them to their advantage, algorithms are ruling the stock market game on every level.
Al·go·rithm (per google)
a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.
I first heard about them a few years back on a news special. Investment firms armed with a special algorithm were almost exclusively ending each of their days on the upside. It was only a matter of time before this became mainstream.
With this came the birth of the Robo-advisers!
- What is a Robo-advisor?
A Robo-advisor is a typically low cost algorithm based investment model.
- Who can use it?
Robo-advisors are generally available to the general public.
The purpose of these models are essentially to eliminate the middleman. Here’s some background to this story. Investing wasn’t mainstream in the old days.
Pre-1990’s, casual investors were paying high fees per trade. This was really cutting into the profits, which forced stock brokers to evolve into financial advisors.
At the same time, lower priced trading accounts like Scottrade and ETrade took their footing. Though, these type of accounts were and still are as low as $7 per trade, an active trader’s pockets can still get hurt.As I mentioned before, a robo-advisor will invest for you. Typically, with no per trade cost. The one I was a part of had no per trade transaction fee but it charged 2% a year on the total balance of the account. Most investors would take that trade off any day!
Why spend all that time and energy on research if a computer program can do it for you? That’s the real purpose of this type of option.
Popular Robo-advisors USA
Wealthfront’s low fee’s are very attractive. They manage $10,000 for free, as well as an extra $5,000 if you invite a friend. Anything above that will be managed at a .25% advisory fee. That is quite the deal! Most financial advisors are charging somewhere around 1% of total assets. For those with significant assets, this can make a huge difference.
Theoretically, we are talking about a $775 difference per year on $100,000 of managed funds. If reinvested that $775 each year for 30 years, at a 7% return, you’ll be somewhere around $840,000. That would be an $80,000 difference over that time. Decimal points matter!
If you’re looking for something free of charge, WiseBanyan is the fund for you. WiseBanyan prides itself on being able to put their customer needs first due to their fee structure. According to their website, their only source of making money is through a la carte products, which is completely optional.
Their investment strategy will be based on questions you answer upon sign up. The result of this questionnaire will produce a tailored portfolio. These questions will center around money saved, risk aversion, and time horizon.
I’d say this would be a great starter fund for someone looking to get into robo-advisers. With no risk in paying fees for something you don’t like, why not?
Know matter how diverse I’ve made my research for this article, Betterment keeps popping up as one of the best most popular robo-advisor’s out there. Their website promises bigger returns in a tax efficient manner. How much bigger? 4.30%! That’s nothing to scoff at.
In addition to their core business, their website has a financial education section. This includes “investing 101” and “personal finance” pages that can help you understand what it’s all about in the first place. I do believe financial education is important, as the average investor doesn’t understand investing on a mere basic level.
Their tiered fee structure is based on the amount of dollars you have in your account. The fee for under $10,000 and under is .35%. Between $10,000 and $100,000 is .25%. Anything over that will be .15%. I’d say those are quite reasonable as compared to thier competitors.
When you consider a robo-advisor you should consider both Wealthsimple which is by far the biggest and most well known robo in Canada. The terms are quite similar to its American counterparts but it is said the service is far more personal. It is rumored this company will branch out to the USA eventually. There is also a tool which enables you to find the best robo advisor based on your requirements automatically.
I do recommend Robo-advisors as a viable option for investing. That being said, I believe it has it’s place in a portfolio. It should not be your whole portfolio!
As with anything else, the overused cliche rings true: all your eggs should NOT be in one basket.