“Robo-Advisors”, such as Betterment, Wealthfront, Personal Capital, and etc. provide valuable portfolio management services to quite a few investors nationwide. They are a bargain compared to most advisors. However, they may not be the best or the complete solution if you are an affluent investor with complex needs. There are certain limitations with “Robo-Advisor” portfolio management services. Below are some:
- > Most of them clear through small brokerage houses. Wealthfront clears through Apex, and Betterment has its own brokerage house. Although they may have to adhere to the same standards as Schwab, Fidelity, and TD Ameritrade, there are inherent risks with smaller brokerage houses.
- > In most cases if not all, portfolios are limited to ETFs as their investment options. No mutual funds or stocks (no MLPs).
- > Investors can only invest cash accounts. If you currently hold mutual funds or stocks, you must liquidate those positions before purchasing their recommended ETFs. This may not be so prudent with a taxable account.
- > Their Investment Policy Statements do not take outside assets into consideration.
- > No Margin accounts. Cash accounts only. (We are generally able to negotiate discounted margin rates as low as 150 to 300 basis points plus fed funds rate for clients with $500,000 or more of investable assets.)
- > Cannot custody self-directed company retirement accounts.
- > Cannot hold custodial accounts (UGMA/UTMA) accounts.
- > No “Backdoor Roth” option available.
- > Cannot change account registrations.
- > No Dollar Cost Averaging option.
- > The software used in Robo-Advisor services rebalances immediately when the current allocation deviates from its target allocation. Frequent rebalancing may be overkill causing unnecessary transactions and capital gains in taxable accounts (annual rebalancing is sufficient in most cases).
- > Their fee is a percentage based on assets under management so the fee increases as your portfolio grows. Wealthfront is 0.25% for all account values and Betterment is between 0.15% and 0.35% based on the size of the account. Personal Capital charges 0.86% on the first million dollars.
- > The fee is debited from the account. None of the aforementioned Robo-Adviors have an option to pay advisory fees separately. This may not be so prudent in retirement accounts since a client’s objective is to hold as much assets as possible in tax-sheltered accounts.
Although Robo-Advisors may be ideal for a young professional who is just starting the accumulation stage of his or her financial lifecycle (Emerging Wealth), but once he or she passes a certain net worth threshold, he or she will most likely require the services of a full-service financial advisor.