A Comparison of Approaches

So I had floated the idea around the holidays of doing some kind of blog series comparing a couple of different investment approaches.  One of the things that created some interest for me in doing this is the appearance on the scene of a number of "Robo-Adviser" type services.  These seem to be trying to fill a niche between a complete do-it-yourself, low cost approach, and the high cost of using a fully managed portfolio with an investment adviser.

Now, as a little bit of background with respect to the experiment that I'd like to launch, I'm one of the folks currently using the Private Client group of a full service investment adviser to manage a significant portion of my portfolio.  It depends on the particular portions of my portfolio, but in general, I'm paying a fee of around 1% of my total assets.  I'm using an asset allocation approach that they recommend and that I'll explain here.  

When you look at one of these automated adviser type services, the fees that they charge can be significantly less than what I'm currently paying my adviser.  They also come up with recommended asset allocation strategies, will handle rebalancing for you, and are investing primarily in very low cost ETF index funds covering a variety of asset types.  For the handful that I looked at, the average annual cost seemed to range from 0.15% to 0.25% (note that this is on top of the fees charged by the underlying mutual funds, but with low cost Vanguard ETF's, this is only around an additional 0.1%.  So that's a significant savings over what I'm paying now.

So what I wanted to find out is, am I actually getting better returns and a better asset allocation for the extra 0.75% that I'm paying each year.

So I'll be running a live real-money experiment here for the next couple of years.  I've put money into one of the "robo-advisers".  I currently expect that I have between 15-20 years until retirement, so I've selected retirement and that time horizon as my savings goal, and the program came up with an asset allocation based on those plans (which I will talk about in a future post).

What I plan to do here is to record the returns each month for my full service investment adviser versus my low cost robo-adviser and see how they compare.  I'll be using the actual account values for these calculations so this will reflect the "after-fee" returns on both of these.  

One other factor that makes these robo-advisers pretty attractive is there are relatively low minimum investments to utilize these services.  One of the services that I looked at had a $500 minimum balance and charged no fees at all for accounts under $10,000.  After that, it was 0.25% of asset value.  Another service was a little less friendly from a fee standpoint depending on how you set it up.  There was no minimum account balance, but they charged $3 per month on accounts under $10,000 (which still only works out to 0.36%), but waived that if you set up a monthly auto-deposit of at least $100.  The attractive thing for this particular provider is that for accounts over $100,000, their fee dropped to 0.15%.

For many of the full service investment advisers, the minimum account sizes can be pretty steep.  Generally more than $100,000 and in many cases more than $1 million, so this is also a way to get high quality advice and allocation without having to have the big bankroll.

In my next post here, I'm going to talk a little bit about asset allocation and compare the asset allocation approaches used by my full service adviser to the one used by my new robo-adviser.