Betterment, one of the biggest robo-advisors, made news a few days ago by announcing they are increasing their fees from .15% to .25%, with no additional benefits or services being offered in return. On a $100,000 portfolio earning 7% a year for 30 years, investors will be left with $30,000 less at the end. That’s got to be worth at least a latte a day. Betterment customers are livid, so it’s worth re-examining robo-advisors as a whole.
What is a Robo-Advisor Again?
Target date funds, such as those offered by Vanguard and Fidelity, are all-in-one portfolio solutions with names like “Target 2035”, for those who expect to retire in the year 2035. These fund holds a mixture of stocks and bonds and slowly makes the portfolio less risky (by adding a higher percentage of bonds) the closer you get to the target date.
Robo-Advisors, like Wealthfront and Betterment, are not actual robots. But they do take the hands-off approach of target date funds a step further. They offer portfolios that you put money into and, based on your risk profile and goals, a computer program buys and sells diversified broad-based funds for you in return for a fee on top of the fee you pay to the fund. They’re like cheaper financial advisors without emotions.
Are They Worth It?
One of the main purported advantages of robo-advisors is that they automatically re-balance your asset allocation for you. They’ll also automatically re-invest dividends for you and even do some tax-loss harvesting in taxable accounts (i.e. not 401(k), IRAs, TFSAs, or RRSPs)
In Building Wealth And Being Happy, I noted that if you read all the way through to the appendix where I discussed robo-advisors, you knew enough from reading the book that you had no use for them. It’s simply cheaper to employ a true DIY style approach using low-cost ETFs because the extra .25% of fees that a robo-advisor takes can add up to tens of thousands of dollars over the life of your portfolio.
Other bloggers disagree. Popular financial independence blogger Mr. Money Mustache, who has a marketing relationship with Betterment, had this to say:
It’s an interesting argument – that the tax loss harvesting and re-balancing services provided by Betterment negate any fees they charge. Or even more so: you might be missing out on money by not investing with Betterment!
But this overlooks a simple point: You can do-it-yourself tax-loss harvest. Simply note when one of your ETF holdings is down below its cost base, sell it (obtaining the paper loss) and buy back a similar fund offered by another ETF provider. I mentioned this to Mr. Money Mustache, who responded:
Yes! You are right in theory… But the way Betterment does TLH algorithmically is several times more efficient than what I could do with some buy/sell orders, even in a brokerage account with Vanguard ETFs. They do stuff rapidly on an intra-day basis, and you KNOW I am not looking at the stock market every day.
Equally important is what you enjoy doing: managing investments is necessarily an indoor, sedentary activity. I already have a surplus of those in my life, so I’d rather outsource it in order to do the other physical/body-based activities. Even though they pay less on a dollars-per-hour basis, they pay more in life-enjoyment-per-hour.
Fair enough! It’s definitely admirable to prioritize your time on things that make you happy, and chances are that tax-loss harvesting isn’t something that puts a smile on your face.
But MMM has presented a false choice:
- Do zero tax loss harvesting on your own or;
- Use betterment for super-efficient, intra-day tax loss harvesting.
Robo-advisors never sleep, and are always looking to trade to your advantage. But there’s a third choice: Do some tax-loss harvesting on your own – maybe a few hours a year. You don’t need to tax-loss harvest every day to get the majority of the losses available to you. I have an (unsubstantiated) hunch that checking even just a few times a year for unrealized losses would allow you to get enough tax-losses to make any extra losses Betterment can provide not worth it at their fee levels.
Robo-Advisors in Canada
Canadian investors get an even shorter end of the stick. Leading rob-advisor in Canada, WealthSimple, offers staggeringly high fees of .5%. Yikes.
Heck, Canadians can’t even get any good Target date fund offerings. Vanguard introduced them for institutional plans (like your company RPP) a few years ago, but if your employer doesn’t offer the Vanguard funds then you’re out of luck.
Still, that doesn’t mean robo-advisors are the worst. In fact, they rank quite favourably compared to expensive mutual fund managers and pushy financial advisors. If you don’t have a few hours to read Building Wealth and Being Happy (shame on you!), then don’t feel bad about using robo-advisors or recommending them to your less savvy friends.