Financial Planning, Investments, Retirement, Saving Money

Robo-Advisors: Cheap Diversification


Sally say…..

Robo-advisors have been rapidly growing in popularity over the past few years, so much so that the big dogs; Fidelity, Ameritrade, and Schwab have jumped into the fray.

What the heck are they?

They are automated online investment accounts where you, the investor, answers a few questions to determine your risk allocation, choose a portfolio, and your money is invested and diversified for you. The beauty is they are extremely low-cost, inexpensive to get in to and well diversified.

Sounds good, huh?

Using algorithms and computers to rebalance and monitor your accounts, you avoid the cost of a “hands on” active money manager.

Low Cost ETF’s

Most Robo-Advisors use Exchange Traded Funds which are tax efficient low-cost vehicles that typically focus on indexing (attempting to replicate the performance of a specific  index).


With the majority of active managers not beating their appropriate index year after year, investors have wised up and decided to save their dough, say goodbye to overpriced funds and use low-cost index funds (S&P 500 for example) for the core of their portfolio, if not the entire thing.

Robo-Accounts have been pouncing on this trend plus the fact people realize paying 1-2% of their account value every year typically isn’t worth it unless the advisor offers such things as comprehensive financial planning, accounting services, estate planning, etc…

Odds are you wouldn’t be reading this blog if you fall into this last category.

Great reporting, Cool App..

One of my favorite features is the reporting the comes with my robo-account, meaning I always know how my account is doing!

Can you tell me how your portfolio is doing this year? Probably not.


That for me was always a big selling point of a managed account. I want to know how my account is performing regardless of additions, withdrawals, sales, etc.

So I can pull up my phone app and instantly know my account is up 13.16% YTD ( no kidding).

In addition, how much I received in dividends lats week, a pie chart breaking out the percentage of Stocks, Fixed Income, Cash and Commodities.

How can they do this?

Easy, there are only a handful of portfolios typically available to choose from rather than your average advisor who is trying to monitor 400 different portfolios with an endless combination of funds, stocks, and ETF’s for his clients.

Schwab Intelligent portfolio

So the really big names that have been at it a while are Betterment and Wealthfront. However, I didn’t feel comfortable putting my bones some place that didn’t have a brick and mortar establishment. So about 2 years ago I opened a Robo-Account with Schwab.

Now if you understand that if you are indexing you are meant to match the market and not beat it, this type of investing may be for you. Again to the point, that your mail man and your annoying cousin at Xmas parties are the only ones that beat the market….

Benefits of this particular account:

  • No management charge
  • No trading costs
  • Rebalance automatically
  • Tax Harvesting ( if account value is over $50k)
  • $5,000 to open one ( that may have changed since I started)

How do they do it? Well Schwab is attracting new dollars to their proprietary ETF’s in the program so that’s where they are making money. Smart.

Its well diversified ( maybe over diversified) among 17 ETF’s and Funds going with the “don’t have all your eggs in one basket” theory.easter-eggs-1231120_1920

  • US Stocks-Large, Small, REITS
  • International Stocks-Large, Small, Emerging Markets
  • US Bonds
  • International Bonds
  • Commodities
  • Cash

So even though these accounts are perfect for the investor newbies, they can make a really nice piece of any portfolio. Have a small IRA lying around, why not simplify life and dump it into one of these?

 pointSo point your owner in the right direction and have him look into a Robo-Advisor…….

Caveat: None of these services have experienced an extended downturn in the market and how their algorithms would react with a lot of clients running for safety at the same time is unknown.