Would You Let A Robot Manage Your Retirement Savings?
Would You Let A Robot Manage Your Retirement Savings?
Comfortable with technology and skeptical of Wall Street, a growing number of young investors have turned to low-fee automated financial advisers for help saving for retirement.
They're called roboadvisers — or robos — and they appeal to Jesus Adrian Perez, 29, a biometric analyst from Albuquerque, N.M., because he knows what's at stake when lots of charges are tacked on to investments.
"I hear about investment advisers — that their fees are always really high, and you end up losing a lot of money in the long run," Perez says.
He signed up with a roboadviser called WiseBanyan, an online financial manager that builds the customer a portfolio of low-fee funds based on the person's age, goals and tolerance for risk. All these decisions are made by an algorithm, not a broker.
And that's fine with Perez.
"I always think robots are better at everything than a human being can do," he says. "They're going to be better at driving cars, identifying diseases. Human error is a big thing — and they're not greedy."
Roboadvisers are significantly less expensive than human ones. The startup WiseBanyan offers a fee-free service. Fees at the largest roboadvisers are a small fraction of those at Wall Street firms and traditional wealth managers.
Greg Smith is the president of a roboadviser called Blooom that seeks out the lowest fee options in a customer's 401(k) plan. Smith says 401(k)s are needlessly opaque and crammed with high-fee funds that perform poorly.
"People don't realize that the public are being used as pawns in this game where billions of dollars are being extracted out of their pockets, and 401(k)s are a great example," says Smith, a former Goldman Sachs banker. "The average American household can pay $150,000 in fees into their 401(k)s over the lifetime of their retirement account."
Like most of the roboadvisers, the Blooom algorithm hunts for the lowest-cost options in a customer's plan. Typically, those are passive index funds that automatically mirror a market index. They don't have highly paid managers. They don't try to beat the market. And Smith says they're the most proven way for people to build a retirement nest egg.
"After dealing with some of the smartest investors in the world for 11 years, I can conclusively say that I did not see any of them routinely beat the market," Smith says.
A Sampling Of Roboadvisers
The term roboadviser is sort of a misnomer: advice is not given out so much as it is built into an investment plan determined by risk tolerance and timelines. Here, a list of some of the more popular roboadvisers on the market.
Betterment*. Created in 2008, it's the oldest roboadviser. Minimum investment: None, and no required balance. Fees: It charges 0.35 percent annually for accounts below $10,000 (with a $100/month auto-investment), 0.25 percent on accounts up to $100,000 and 0.15 percent for balances above that. Worth Noting: As the robo market has evolved, the company has expanded its focus on people who are already tapping their retirement income; a quarter of its customers are 55 and older.
Wealthfront. Launched in 2011, it currently touts around $2.6 billion in client assets, one of the largest among roboadvisers. Minimum investment: $500 for the basic service. Fees: None on accounts up to $10,000, 0.25 percent annual fee on accounts above that.
SigFig. Like Betterment and Wealthfront, SigFig is a startup. Minimum investment: $2,000. Fees: None on accounts up to $10,000, 0.25 percent annual fee on accounts above that.
Charles Schwab's Intelligent Portfolios. A recent addition to the investing titan's stable of offerings. Minimum balance: $5,000. Fees: Schwab eliminates management fees altogether, earning only on exchange-traded funds' expense ratios (ranging between 0.04 and 0.55 percent). Worth noting: Schwab is relying on its brand name and institutional knowledge, in addition to the stability of $2.5 trillion in overall client assets.
Personal Capital. A robohybrid that offers both an algorithm for asset allocation and access to human advice. Minimum investment: $100,000 minimum for new customers. Fees: Balances are charged 0.85 percent annually until the account reaches $1 million. Balances over $1 million are charged less, depending on the total amount. Worth noting: Personal Capital aims for bigger investors, with an average account balance of $300,000.
Vanguard Personal Advisor. Another hybrid that pairs digital advice with the personal connection of a human adviser. Minimum investment: $50,000 for new investors. Fees: 0.30 percent annual fee.
Blooom. The company will look into your current (non-Blooom) 401(k) or equivalent plan and will construct and implement a strategy for adjusting asset allocation and diversification. Minimum investment: None — Blooom only works with pre-held investments. Fees: $1 per month for accounts under $20,000. For accounts above $20,000, it's $15 a month. Worth Noting: Yes, there really are three "o's" in the name.
*Note: Betterment is a sponsor of NPR programming.
--Robert Winship, NPR
In 2012, Smith quit Goldman Sachs and slammed the company in a New York Times opinion piece. He wrote that Goldman's culture had become warped and it was taking advantage of clients. According to Goldman, Smith left because he wanted more than a million dollars in salary, about double what he was earning. Now Smith works for a lot less — he calls it a startup salary — from a co-working space in midtown Manhattan next to Web designers, a literary agent and a high-end tea manufacturer. He says it's exciting. Roboadvisers like Blooom are at the birth of something big.
"We think the whole industry is basically stuck in the 1970s, and finance and retirement might be one of the last bastions for the consumer that technology has not really helped at all," he says.
Now this seems like the inevitable moment to say that roboadvisers will disrupt financial planning, that investment advisers will go the way of travel agents. But there's no sign of that happening yet.
"By comparison to the established players, it's a very small amount of money we're talking about," says Sean McDermott of the research firm Corporate Insight. He says the thing to watch is that the use of roboadvisers is trickling up from millennials to older generations.
"Their parents turn to them to ask for advice about the newest and latest technology that's out there," McDermott says. "We don't think it's too large of a leap to say that they've been steering some of their parents into these services."
Roboadvisers were created with people like Allison Bowling, 32, in mind. Bowling works in the industrial packaging business in Denver. She's at ease with technology and very aware of where her money goes.
"I really thought, based on what I was being charged in my employer retirement plan, that I didn't have anything to lose by trying out something different," she says.
So she puts some of her retirement contributions — $5,500 a year — into a Roth IRA with Betterment. Plus, 10 percent of her income goes into a brokerage account there.
That's extreme saving.
"In my age group, we don't have the pension fallback of our parents' generation. And we hear a lot about Social Security and whether or not that's going to be available. It's terrifying really. So I do probably save more than a lot of people, but I'd rather be prepared than not," she says.
Laura Varas, co-founder of the market research firm Hearts & Wallets, says millennials like Bowling have been overlooked as investors. So it's natural that they became the initial target audience for roboadvisers. In focus groups with millennial investors, Varas said, it was clear they wanted accountability and straight talk when it comes to financial advice. They were attracted to roboadvisers because their sites clearly answered the questions, What do you do? How do you earn money? How do I evaluate you?
When it comes to transparency and cost, roboadvisers score well compared with traditional wealth managers. One criticism is they haven't been tested in a severe market downturn. Will investors panic and flee the market at the worst possible time if they don't have a human adviser to talk them off the ledge? Is the human touch worth the additional cost? (Without a doubt, argue the traditional wealth managers.)
But roboadvisers aren't always completely robotic. For example, the startup Personal Capital and roboadvisers launched by fund giant Vanguard and the brokerage firm Charles Schwab offer customers human advice to go with their automated portfolios.
At last count, according to Corporate Insight, the leading roboadvisers were giving advice on $21 billion in investor assets, up 34 percent from last year. It sounds impressive — though, for perspective, the mutual fund giant Fidelity — by itself — manages more than $2 trillion. Humans, with all their flaws, still rule financial planning. The robots have their work cut out for them.