Robo-advisors always claim they're cheap. But just how cheap are they?
How much 'robo-advisors' charge depends on definition and portfolio size.
Robo-advisors pride themselves as liberators “democratising finance”. As foils to greedy “men in cufflinks” and the “paid friends” of traditional wealth advice.
But just how cheap and democratising are robo-advisors?
Well, it turns out, that depends heavily on what is meant by “robo-advice” and who you think the competition is.
According to research by Meb Faber, CIO of Cambria Investments, all robo-advisors are cheap, but some are significantly cheaper than others.
While what Mr Faber dubs “pure robo-advisors”, such as Betterment and Schwab, charge less than 30 basis points, other digital platforms often lumped in with robo-advice charge much more.
By Mr Faber’s calculations, “cybor advisors” – sometimes called hybrids, because they use both people and robots – charge double what pure robo-advisors do. And wealth advisor apps, such as Acorns Australia and StashAway, charge even more still - sometimes as much as 8 percent a year.
“Millennials love these investing apps but they must be terrible at math,” Mr Faber told Financial Planning. “These are great businesses but they are kind of predatory because the accounts are, on average, $100 to $200. A dollar-a-month fee is a lot for a $20 account.”
Acorns CEO George Lucas has rejected the robo-advice label in the past, saying “Acorns is not technically robo-advice. However, we offer a similar service”. StashAway is licensed to operate as a robo-advisor in Singapore and appears to have embraced the label.
Conflicting positions from similar platforms make analysing costs harder. But the question of cost is made more confusing still by exchange traded funds – also included in Mr Faber’s survey.
Robo-advisors rely on ETFs to operate, sometimes directing investors into portfolios consisting entirely of ETFs. But for many analysts, it is ETFs themselves – not traditional wealth advisors – who are robo-advisors’ top competition.
ETF’s can charge as little as 0.05 percent annually – significantly less than robo-advice. Which for many raises the question: why go to robo-advice when you can go straight to ETFs?
Graphic taken from Meb Faber's blog, available here: http://mebfaber.com/2017/03/31/all-the-fees-in-the-world/