Sometimes people ask Jon Stein, founder of the digital advising site Betterment.com, why they should allow a computer to manage their investments. His response is simple: Why wouldn't they?
Computer algorithms aren't emotional. They're not fearful or greedy. They don't get lazy or take vacations. They don't have conflicts of interest, and they aren't subject to all the irrational behavioral biases that make investing so hard for humans to get right.
"We all use algorithms in our daily lives to simplify common tasks -- screening spam from our email, requesting directions from home to a restaurant, finding books or music we might enjoy," Stein says. "Now we're applying algorithms to optimize retail investing."
Digital advisers charge less to manage money
Digital advisers tout their ability to make investing simple, easy -- and cheap. Some, including Jemstep and SigFig, offer free analysis of your portfolio and suggestions for improving your returns.
The sites that actually manage money for you -- Betterment, Wealthfront, FutureAdvisor and now SigFig, which recently added management services -- favor ultralow-cost exchange-traded funds and typically charge 0.25 percent to 0.5 percent of the amount clients invest with them. That compares with wrap fees of 1 percent or more at brokerages and many financial planning firms, on top of whatever the investments cost. It's not unusual for brokerage clients to end up paying 2 percent "all in" -- wrap fees plus investment costs -- while the total cost at sites like Betterment and Wealthfront is typically under 0.6 percent.
Digital advisers put investing on autopilot
Certified Financial Planner and blogger Michael Kitces, who has closely followed the growth of the digital adviser industry, says the investment management sites "are becoming very sophisticated in their capabilities to effectively execute a core diversified portfolio at a very low cost."
"For those who want assistance in constructing a well-diversified portfolio they can set on autopilot -- with technology to oversee the key issues of rebalancing and tax-loss harvesting -- and not need to worry about it, this new generation of online investing tools provides an appealing new option," says Kitces, a partner in Pinnacle Advisory Group of Columbia, Maryland, who blogs at Nerd's Eye View.