Automated Investment Planning

Betterment, FutureAdvisor, Wealthfront and Schwab

Automated Investment Planning
September 12, 2016

You do not feel confident in your ability to personally invest or manage your IRA and 401(k) accounts, yet you do not have enough money in your account to afford a financial investment adviser. That makes you part of the target market for an increasing trend in investing — automated investment planning, or as these efforts are sometimes called, robo-advisers.

There are numerous robo-advisers trying to fill niches, but they have a common thread: they use complex algorithms based on particular goals to automate the buying, selling and rebalancing of portfolios. This keeps overheads low and allows these services to charge minimal fees and accept lower starting amounts for investments. Generally, these companies invest in ETFs (exchange-traded funds) that track certain indices to keep the risk levels predictable and the costs relatively low.

Four entrants in the automated investment market are discussed below.

  • Wealthfront – Wealthfront is one of the better services with respect to "set it and forget it" growth investing. It is an investment management service, meaning that they do not hold the portfolios themselves, but instead manage them through Apex Clearing Corporation — in essence, acting as an automated discount brokerage.

A questionnaire is used to assess your risk tolerance, and a model portfolio is set up for you. The portfolio will be different depending on whether the account is taxable or tax-deferred. The minimum account balance is $5,000 and fees, 0.25% annually, are free for the first $15,000. Rebalancing is done using tax-efficient principles, with tax-loss harvesting available for all accounts regardless of size.

If you are looking for a totally hands-off automated system tilted toward growth and tax efficiency, and are fine with maintaining your own cash options separately (as the program recommends), Wealthfront may be your best choice.

  • Betterment – Betterment is more of a goal-oriented service that appears to be an excellent choice for beginning investors with intermediate investment amounts and a steady income. You answer questions about your goals, set the time-horizon and asset allocation between stocks and bonds, and link to your bank account to transfer funds. Automatic monthly transfers are available to make the process even easier and mimic a traditional savings plan.

Betterment fees run between 0.15%-0.35% annually with no minimum balance, although if your balance is less than $10,000, you must deposit $100/mo. or pay a $3 penalty. The account is rebalanced quarterly if it is off by more than 5%. A dashboard allows you to see your current allocation and track progress towards your goal.

  • FutureAdvisor – If you still have more of a DIY investor attitude and are looking solely at retirement benefits, FutureAdvisor may be best for you. Rather than starting from ground zero as many of the services do, you can link with an existing brokerage account. FutureAdvisor can assess your current situation and automatically trade based on the asset allocation that they recommend.

FutureAdvisor requires a $10,000 minimum balance and charges 0.5% annually, although you can try their DIY service for free. In that case, there is no trading activity taking place, just information and analysis.

  • Schwab Intelligent Portfolios – Schwab's new entry into the field charges no annual fees and requires a minimum of $5,000. Schwab's large portfolio of in-house ETFs gives them an advantage with respect to fees — in essence removing a middleman. Services are similar to Betterment and Wealthfront.

Initial reviews suggest that they keep an unusually high cash component compared to the other services, which may be how they can keep the service free. As a smaller investor, you may not care, but for large investment amounts, the cash allocation can be a serious drag on the growth.

There are multiple other players in the field, including SigFig, LearnVest, Personal Capital, and Vanguard Personal Advisor Services. Before selecting one, check them individually with respect to the automation level, degree of tax optimization at your investment level, the amount of input you have, and whether the service is goal-oriented or growth-oriented. Match the results with your needs, and you will make the right choice. You may also choose to split your investments and use more than one service — diversifying your automation, in a manner of speaking.


Photo ©iStock.com/ktsimage

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Christina | 09.12.16 @ 15:25
Great information - I fall into that category of not feeling comfortable managing my 401k personally, but a financial advisor is out of my price range. I'll definitely be checking out some of these suggestions!
Daniel Dohlstrom | 09.12.16 @ 15:33
Very fitting and helpful tips here for those not able or ready to get an advisor, just entering the financial arena, or even looking to add to current plans.
Zanna | 09.12.16 @ 16:42
This is something I would like to learn more about. Investments into the market scare me, and I don't want to trust the wrong advice and lose everything. This looks like a method that might work for me!
Sara | 09.12.16 @ 20:48
Helpful tips. However, I really do not see me managing a 401k without help.
$commenter.renderDisplayableName() | 12.08.16 @ 04:36
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