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Updated on Monday, July 6, 2015
Technology and innovation are making it easier and easier for people to access high-quality, low-cost investment strategies, no matter how much money they have to invest.
The robo-advisor has exploded onto the scene over the past few years, introducing automated investment platforms that recommend, implement, and manage your investment portfolio for you.
And while they all offer most of the same services at a low cost, we decided to dig deep and figure out exactly how much each of these platforms cost.
We looked at two types of fees across five of the major automated investment platforms:
- Portfolio fees – The cost of the underlying investments. Given that the recommended investment strategy will differ depending on your age and goals, there is actually a range of potential costs for each platform that makes a direct comparison difficult. For our purposes here we posed as a 28 year old making $60,000 per year with $25,000 to invest and have calculated the cost of the recommended strategy for each platform.
- Advisory fees – The cost of using the investment platform. This is on top of the portfolio fees.
Let’s see how they stack up.
For our 28 year old investor, Betterment recommended an aggressive portfolio of 90% stocks and 10% bonds. The total cost for this portfolio is 0.10% per year.
Here’s a detailed screenshot of Betterment’s recommended investment strategy, including the specific ETFs it uses:
Betterment has a tiered pricing strategy where the cost for the service depends on the amount of money you have invested with them. Here is how it works:
- $0-$10,000 invested
- 0.35% per year if you set up an automatic monthly contribution of at least $100.
- $3 per month without that automatic monthly contribution.
- $10,000-$100,000 invested
- 0.25% per year
- $100,000+ invested
- 0.15% per year
The services that come with this fee include:
- Goal setting (for retirement, emergency fund, one-time expenses, etc.)
- Automatic rebalancing
- Tax loss harvesting
Like Betterment, WealthFront recommended an aggressive strategy with 90% of the investor’s money in stocks and 10% in bonds. Because of some differences in the actual ETFs used, the total cost for this portfolio came in slightly higher at 0.16% per year.
Here’s a detailed screenshot of WealthFront’s recommended investment strategy:
WealthFront is free for account balances of $10,000 or less, though there is a $5,000 minimum investment.
For any amount over $10,000, it charges a flat fee of 0.25%. Some of the services offered as part of this fee include:
- Automatic rebalancing
- Daily tax loss harvesting
- For accounts over $100,000, it offers a service called Direct Indexing that claims to add even more tax-efficiency.
Schwab’s new Intelligent Portfolios service offered up a slightly different investment strategy for our 28 year old investor. Here’s what it looked like:
- 77% stocks
- 11% bonds
- 7% commodities
- 3% cash
Unfortunately, Schwab doesn’t make it clear which specific ETFs it uses, which makes it difficult to determine the cost of this portfolio. However, in its FAQ Schwab states that the total portfolio cost ranges from 0.18% for more conservative strategies to 0.26% for more aggressive strategies.
Here’s a detailed screenshot of Schwab’s recommended investment strategy:
Schwab’s service is free no matter your account balance (though there is a $5,000 minimum account balance). Schwab is primarily making money by including some of its own funds within its recommended investment portfolios, which pays them part of the fee included in the portfolio cost above.
This is in contrast to services like Betterment, WealthFront, and WiseBanyan who do not have their own funds and are therefore only recommending funds from other companies.
The services offered include:
- Automatic rebalancing
- Tax loss harvesting for accounts over $50,000
- Goal setting (retirement, emergency fund, etc.)
Vanguard’s Personal Advisor Services mixes the automated investing of other platforms with the personal touch of being able to speak with a real live personal financial advisor. More on the personal advisor below.
Vanguard doesn’t reveal its specific portfolios on its website, but others have found that they closely mimic Vanguard’s already popular target date retirement funds (which, by the way, you can already access on your own).
Assuming that Vanguard’s service would recommend a portfolio similar to its Target Retirement 2050 Fund, and assuming they use Vanguard’s lower cost admiral shares, our investor would end up with a portfolio that is 89.5% stocks and 10.5% bonds and a total portfolio cost of 0.08%.
Here is what that portfolio would look like:
This is where things differ from the other automated investment platforms.
For those with at least $50,000, Vanguard connects you with one of their financial planners who will help you create a customized investment plan. You can also call in to speak with a financial planner any time you have questions, though you only get a dedicated advisor if you have $500,000 more. Those with lower balances call an 800 number and speak with whichever planner they happen to get.
The charge for this personal service is 0.30%.
WiseBanyan is relatively unknown compared to its competitors above, but it’s actually the lowest cost offering.
WiseBanyan recommended a slightly more conservative portfolio for our 28-year-old, putting him in a portfolio with 82% stocks and 18% bonds. The total portfolio cost is just 0.09%.
Here’s what the portfolio looks like:
WiseBanyan is free for its basic services, which include portfolio implementation and automatic rebalancing.
It is planning to make money by charging users for additional services, which include:
- Personal tax preparation
- Tax loss harvesting
- Concierge services
The cost for these services is not clear on the website, but it’s important to note that you do not have to use them.
WiseBanyan does include some additional fees for certain types of transactions, which are outlined here.
Summary and Other Considerations
Here’s a quick summary of each platform’s portfolio fees, advisory fees, and total cost:
Now, keep in mind that the portfolio fees will differ depending on the specific portfolio recommended. The numbers here only represent the single recommendation we got for our purposes here.
It should also be noted that while cost is an important factor, things like investment strategy should also be considered. It’s probably not worth investing in anything if you don’t agree with the strategy or you don’t understand it.
Finally, while these platforms have been coined “robo-advisors”, there’s a big difference between a platform that automates your investments and a fee-only financial planner who can help you get a handle on your entire financial situation.
Still, these automated investment platforms are an encouraging step forward for investors. They make it easy to access a low-cost, high-quality investment strategy, and that is always a good thing.