Digital adviser services — commonly known as robo-advisers — can help you pick investments or even manage your portfolio for much less than a human adviser might charge.
Regulators, though, are concerned that some investors don’t realize what they’re getting, and what they’re not, when they sign up with an online investment management site.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority issued a joint alert in May saying people need to understand the limitations and costs of automated investment tools.
The popularity of robo-advisers is exploding. The amount managed by online investment advice services is expected to triple this year to $60 billion. Startups such as Betterment, Wealthfront and Personal Capital have been joined by heavyweights such as Charles Schwab and Vanguard. In most cases, the digital advisers ask investors a few questions to create a portfolio using low-cost exchange-traded funds and then regularly rebalance the investments to the target asset allocation.
The advisory fee for online investment managers is typically between 0.25% and 0.35%, compared with the roughly 1% many human advisers charge for assets under management. The cost of the underlying investments might be as low as .05% each year, compared with the 1% or so charged by a typical mutual fund.
And as with human advisers, investors also should find out if a digital adviser receives any form of compensation for offering, recommending or selling certain investments. Investors need to learn about the exit strategy: how they can terminate the relationship and how long it may take to cash out the investments if they stop using the tool.
Since the tools often are programmed to consider only certain options, such as exchange-traded funds, investors should understand what those options are and why they were chosen. Are those the lowest-cost options available, or have the choices been limited to investments offered by an affiliated firm?
Most don’t offer comprehensive financial planning that includes other money topics, such as budgeting, insurance, estate planning or taxes. While some robo-advisers combine digital advice with a human adviser, most do not, which means “you may lose the value that human judgment and oversight, or more personalized service, may add to the process,” the regulators note.
Also, investors should take the usual steps to safeguard information by making sure to use secure sites (URLs that begin with “https” rather than “http”), employ strong passwords and not access the site through shared computers or unsecured hot spots.