I have been collecting specs on several robo-advisor services in an effort to determine:
1) Do robo-advisors that offer auto-rebalancing, auto tax-loss harvesting (TLH), and smart weighting strategies make up for their fees when compared to a passive unmanaged portfolio?
2) If so, which robo-advisor is better than the rest?
Here are the services I've compared and their approximate categories.
Note: these are non-affiliate links, b/c I don't want to break any rules, but if you decide to try one of the services, please let me know so we can each save some fees.
Vanguard 3-fund portfolio - passive DIY
Schwab Intelligent Portfolio - passive robo
Betterment Digital - passive robo
Betterment Plus - passive robo
Betterment Premium - mostly passive robo
Personal Capital Investment Service - semi active robo
Personal Capital Wealth Management - semi active robo
.
Here is a chart comparing each service:
(Italics indicate best in category)
| Service: | V3F | SIP | B Digital | B Plus | B Premium | PC Investing | PC Wealth Management |
|---|---|---|---|---|---|---|---|
| Advises outside assets? | No | No | Weighted but no advice | Weighted but no advice | Weighted but no advice | Advises outside assets | Advises outside assets |
| Cash drag? | No | Yes | No | No | No | No | No |
| Asset weighting strategy? | Market Cap | Market Cap | Market Cap | Market Cap | Market Cap | Smart Beta | Smart Beta |
| Portfolio customization? | Broad asset allocation | Broad asset allocation | Broad asset allocation | Broad asset allocation | Broad asset allocation | Broad asset allocation | Customized |
| Mutual funds, ETFs, or stocks? | MFs & ETFs | ETFs | ETFs | ETFs | ETFs | ETFs | ETFs & Stocks |
| Auto-rebalancing? | No | Yes | Yes | Yes | Yes | Yes | Yes |
| Access to CFPs? | No | No | No | Once per year | Unlimited; team | Unlimited; team | Unlimited; dedicated |
| Access to tax professionals? | No | No | No | No | Yes | Yes | Yes |
| Auto tax efficient placement? | No | No | Yes | Yes | Yes | Yes, limited | Yes |
| Auto tax loss harvesting? | No | Acts > 50k | Yes | Yes | Yes | Yes, limited | Yes |
| Minimum balance | ~$9,000 | $5,000 | $0 | $100,000 | $100,000 | $100,000 | $200,000 |
| Management fee? | 0 bps | 0 bps | 25 bps | 40 bps | 50 bps | 89 bps | 89 bps |
| Avg. OER (aggressive portfolio)? | 7 bps (ETFs); 16bps (MF) | 22 bps | 9 bps | 9 bps | 9 bps | 10 bps | 10 bps |
.
Results:
The determination of which service is best depends largely on your individual situation, but assuming the goal is to maximize post-fee returns, which of the above services has the highest potential to do so (assuming you meet all min balances, etc.)?
.
Vanguard 3-fund: Here we want to address whether an unmanaged passive DIY portfolio would outperform a passive/semi-active robo advisor (which is difficult to do). The comparison chart indicates that Vanguard is last in terms of services offered, but potentially first for fees (assuming you use ETFs instead of mutual funds). The returns generated by this portfolio would largely depend on how hands-on you want to be. It would require manual re-balancing, manual TLH, and manual tax efficient fund placement (especially if you grow beyond 3 funds and included more complicated account types). However if you commit to the DIY approach then this portfolio may outperform the Schwab IP and Betterment Digital services.
.
Schwab IP: It seems clear that this service is the worst of the robo advisors because of the significant mandatory cash drag incorporated into their portfolios and higher threshold for implementing TLH. Also they lack many nice perks from the other services like access to a CFP and ability to manage/advise outside assets.
.
Betterment: Betterment is certainly better than Schwab IP, but perhaps not better than Personal Capital. The management fees vary from 25 bps to 50 bps depending on the number and quality of services you desire (mainly the frequency of interaction with a CFP). Betterment uses a standard market cap/S&P 500 indexing strategy and similarly broad asset allocation based on your risk tolerance or investment timeline.
.
Personal Capital: Here is gets a bit fuzzy. It is difficult to determine whether the benefits offered by Personal Capital are worth their fee. PC offers the best of every category surveyed (except for fees and min balance). What needs to be determined is whether the features that are unique to them provide a benefit greater than the difference in fees from the other services. They claim that their smart beta weighting (or "tactical weighting") averages a +1.1% return over traditional S&P 500 indexing.
Thus it may be that the combination of their smart beta weighting, unlimited access to a dedicated CFP, 100% customizable portfolio construction, and holistic advice across all outside assets provides more than 39 bps of value as compared to the Betterment Premium. Further, it seems likely that PC provides more than 89 bps of value compared to a Vanguard 3-fund DIY portfolio given the automated tax efficiencies and auto-rebalancing in addition to the above mentioned features.
.
TLDR: Based on the features offered by each service I suspect they rank accordingly: PC Wealth Management > PC Investment Service > Betterment Digital > Betterment Plus > Betterment Premium (only if you have more complex needs) > Vanguard 3-fund (if you commit to managing it regularly) > Schwab Intelligent Portfolio.
How would you quantitatively compare the value of each service?
Submitted July 11, 2017 at 02:42PM by I_eat_insects http://ift.tt/2t1cONQ
