Comparison of 13 Robo-Advising Platforms

[Disclaimer: The goals of this article are to: 1) provide a comparison tool for a wide-range of robo-advisors, and 2) be a thought-starter for different types of investors. Information presented should not be viewed as financial advice.]

I curate the TechStars FinTech Startup Digest, and the articles on robo-advisors usually center around which platform is better. The measurement discussed is the return on investment. Here a 6% return can mean substantially more than a 5% return depending on the scale of the investment. However, there is not a great deal of public data that can debunk, with certainty, which platform consistently outperforms the rest, especially with tailored solutions for each individual.

There was an article where the writer invested five-thousand dollars in five platforms for one-year (1). The article is helpful, but one year is not enough to tell the whole story of an investment portfolio, or a robo-advising platform. There is another site (2) that is regularly updated with the returns invested in five other platforms. Data for this site goes back to 2013, which begins to paint a more robust picture of performance. However, in lieu of a five- and ten-year return across all robo-advising platforms, the site data does not enable an individual to make a fully informed decision.

It would take a great deal of money, and time, to test most platforms to say with certainty which platform would consistently outperform the others. If you don’t have a great deal of liquidity, or time, then I propose looking at a few other metrics to consider what platform to use.

Robo-Advising Comparison

Before moving into platform considerations, we should start with an audit of popular robo-advisors. A side-by-side comparison of thirteen companies are below. This provides a solid reference to learn what platforms are available, and which one would be best for your needs. Most data was found on each company’s website.

Robo-Advising Metrics

The metrics I would use to evaluate these robo-advising platforms go back to a simple equation: Profit = Revenue – Cost. Each investor wants to maximize their profit. We will take a closer look at what affects revenue and cost, more specifically.

Revenue

Return on investment is the main metric for revenue. We cannot truly predict performance with certainty, and this is what makes the selection process difficult. To simplify the comparison, we will assume there are many smart people in each company and the return on investment will be similar, or at least within one percentage point difference. (I know. Even one percentage point matters, but we need to eliminate this as a concern to showcase other considerations.)

Cost

Cost is more interesting because there are a number of items that fall into two categories: apparent and unapparent costs.

• Apparent cost – platform fees
• Unapparent cost – cash not invested, underlying fees for ETFs, tax strategies

Platform fees are self-explanatory, and the only decision point with complete data. Most people will make a robo-advising decision based on this data point, and that is fine. However, there are a few costs that are not as apparent that should be taken into consideration because these items will affect a portfolio’s profit result.

There are some platforms that require an investor to hold a certain amount of the account in cash. This varies and is not stated clearly on any of the company websites. From anecdotal evidence, Wealthfront holds 1-2% of an aggressive account in cash, while Charles Schwab Intelligence Portfolio holds 7-8% of an aggressive account in cash. Neither is better than the other. The importance in the amount of cash is dependent on how an individual’s additional wealth is invested. If an individual does not have additional cash, and only has cash in their Charles Schwab Intelligent Portfolio, then it might be nice to have some liquidity and less risk. However, the percentage of cash is important to consider because it means that the amount held in cash is not earning a return. This amount of lost return can become material over the long-term – eg. ten years.

The second unapparent cost is the underlying fees of ETFs. It’s unclear whether these fees are rolled into the platform fees of each company. I would recommend checking on this topic with each company you are interested in. An ETF is usually less expensive than say a mutual fund, but there still is a cost. WiseBanyan is a great example of a company being transparent with ETF fees in their help section here.

The last unapparent cost is if a platform has a tax strategy in place. A few common strategies are tax-loss harvesting, or tax coordinated portfolio. There are a few robo-advisors that offer more sophisticated models, but ultimately, the tax lift cannot be predicted with certainty. It is important just for a company to offer a tax strategy. Let’s use an example. An individual invests $10K in account A that has a tax-loss harvesting plan, and $10K in account B that does not have a tax-loss harvesting plan. At the end of the year the individual’s return was 10% with both accounts, but account A had an additional 2% lift with the tax-loss harvesting plan. This means that account A’s total yearly performance was 12% and account B’s total yearly performance was 10%. The clear winner is account A.

Robo-Advising Considerations

A robo-advising platform selection will vary based on your experience with investing and the amount of time you have to invest each month. I created a chart below that shows my recommendation for three type of investors based on investment experience – no experience, minimal experience, and high experience. Individuals who have minimal to no investment experience should consider a robo-advisor. A robo-advisor may not work for someone who is comfortable trading, and has enough time to monitor their investments.

No experience

A few thought starters to individuals who are new to investing, is to try platforms that are free. This minimizes the risk to learning and getting comfortable with the concept of investing. There are a number of strong candidates that I evaluated that will allow you to try their product before committing to higher levels of investment.

• Acorn started as a micro investing platform. The service rounds up each credit card transaction to the nearest dollar, and places that small amount into an investment account. Now there are ways to invest larger amounts similar to the other robo-advisors. This is a great way for students to try investing because it’s free. Non-students will be charged $1 per month up to a $5K investment.
• Blooom is a great way for individuals to better understand their investments with their 401Ks. The company offers a free analysis that will enable the investor to identify if additional help is needed.
• SoFi started as an online lending platform for higher education like business and law school. Today it offers wealth management as a service, and the best thing is that it is free if you invest more than $100 but less than $10K. This is a great way to start investing.
• Wealthfront is a solid robo-advisor with a small minimum investment of $500, but it remains free from $500-$10K. The best part is that it has more advanced tax strategies in place that can be tested.
• WiseBanyan is an extremely transparent robo-advisor that is free for all limits of investment. Absolutely free to invest! Individuals can choose if they want to pay for a service upgrade. Another key part is that offered is a tax strategy as a paid service.

Minimal experience

For minimal investors, I suggest looking into robo-advisors listed under no experience particularly Wealthfront and WiseBanyan. There are two more I would also consider. Minimal investors have prior investment experience and may not need to test a platform. Something more advanced like a tax strategy would be appealing to drive a higher return on investment.

• Betterment has both tax-loss harvesting and tax coordinated portfolio strategies, and human advisors to consult. Their basic platform is reasonable at a 0.25% fee compared to other companies.
• Charles Schwab has tax-loss harvesting included in its Intelligent Portfolio and is free after a $5K minimum investment. 

High experience

Investors with lots of investment experience do not need to invest in a robo-advisor if the investor has enough time to monitor their investments. However, if the investor feels strapped for time, then a robo-advising platform may be helpful for part of their total investments. There are four platforms I suggest considering: Betterment, Charles Schwab Intelligent Portfolio, Wealthfront, and WiseBanyan.

Here are the thoughts I used to identify these four companies:

1. Platform fees are 0.25% or under. Anything more seems silly and similar to the 1% cost of a financial advisor.
2. These platforms can manage large investments.
3. Tax strategies are built into the platform and offered automatically. The only exception is WiseBanyan, but if adding the tax service is less than 0.25% then it should remain a consideration because it may be cheaper than other.

Investors with experience should call these companies to understand the other two unapparent costs discussed – cash not invested, and underlying fees for ETFs. These two pieces of information will enable you to make a more informed decision on what platform will best be suited for your needs. There are other services, like having someone to speak to, that may be beneficial to these investors, but it comes down to personal preference.

Conclusion

Hopefully I completed the two goals of this article: 1) providing a comparison tool for a wide list of robo-advising platforms that are available, and 2) being a thought starter for different types of investors based on experience level. The process of evaluating robo-advisors is difficult because there are many things that are more grey than black and white. A company’s platform fee is the only certain thing. Other things like the return expected, lift in return from tax strategies, cash not invested, and underlying fees for ETFs are either difficult to estimate or not usually shared on the company’s website. A savvy investor may ask a company’s support team about these areas.

Financial decisions are deeply personal, and ultimately depend on what an investor needs. Investors in any category may need someone to speak to about their investment strategy or to ask questions to learn more about investing. This means that some of the platforms listed in the chart would not work for these individuals. At the end of the day, make the financial decision that is right for you based on what you need. 

Happy investing!

Footnotes:

1.    CNBC, Returns Vary Widely For Robo-Advisors With Similar Risk, September 7, 2016, https://www.cnbc.com/2016/09/07/returns-vary-widely-for-robo-advisors-with-similar-risk.html.

2.    Senzu, Compare Performance & Portfolios Of Robo Advisors, https://senzu.io/investing/robo-advisors.

3.    Business Insider, Betterment vs Wealthfront: How 2 of the Most Popular Robo-Advisors Stack Up, July 30, 2017, https://www.businessinsider.com/betterment-wealthfront-robo-advisor-comparison.