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A Review of Our Favorite Robo Advisors with Investor Junkie

 

What is a robo advisor and should you use one? Larry Ludwig from Investor Junkie joins us to tell us what we need to know.

A robo advisor is an on-line money management service that uses automated algorithms to give investment advice. It takes humans out of the equation.

These are companies like Betterment, which was the first robo advisor, Wealth Front, and Personal Capital. They are geared towards younger people who are comfortable with transacting business on-line and are less expensive than traditional investment advisors.

Robo advisors use a lot of complicated math but basically they look at past returns to determine future returns.

A problem with some robo advisors is that while they’re tax efficient within their portfolio, they don’t all have an over all picture of your investments so are not tax efficient overall.

A robo advisor should be easy to use and inexpensive. Larry recommends Betterment above the others. If you need a little hand holding, he recommends Wealthfront.

Robo advisors aren’t perfect but it’s better than just throwing your money into an account and hoping for the best. And if you are the set it and forget it type, they’re the easiest way to do that.

betterment review

Betterment Review aka An Epic Betterment Experiment

Unsure how to get started investing or where Betterment fits in? This Betterment review includes all of that, a chat with their CEO and the kitchen sink.

Show Notes

Son of a Peach: An American wheat ale.

Investor Junkie: Larry’s site about all things investing.

Betterment: The easy way to invest.

Wealthfront: Investing and money management.

Personal Capital: Invest with confidence.

WiseBanyan: Free financial advisors.

 

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  • I think this robo advisor is really perfect! I really want to try this robo advisor.

  • Justin

    Technical question for Larry. The podcast (which was great guys), described monte carlo simulation as resampling observed data, but monte carlo methods pull fictitious data from probability distributions based on observed data, right? It sounds hair-splitting but the methods can strongly differ on returns and uncertainty.
    Also, it’s pronounced Wise BAN-yen (as in the tree). Sorry, for the pickiness, I’m actually a forester statistician!
    FYI I use WiseBanyan, Robinhood & Acorns and recommend them all (esp. the first two). They really do make taxable investing much more accessible than the vanguard approach because of the low buy-in requirements. And though there are concerns over their long-term viability, I feel safe with their SIPC protection.

  • bythedog

    Although these guys are completely sincere, they can sometimes sound like a Betterment commercial, so here are some of my honest thoughts. After listening to LMM, I’ve been with Betterment for about 6 months. Here are some pros and cons off the top of my head:

    Pros
    Diversification
    Simplicity- You just put money in, and they do everything for you. Also related to this is that they decide which ETFs to put your money in. This is a good thing because oftentimes you are your own worst enemy.
    Lack of choice- although this can also be seen as a con, not having too many choices for where your money goes can be a good thing. This reduces the chances of your making a mistake.
    Auto rebalancing- This is a valuable, time-saving feature.
    No trading- Again, this is related to the other stuff above, but it’s a good thing that you don’t do any of the trading. I don’t know anything about bid/ask spreads or limit orders. I’m happy that they know this stuff for me.

    Cons
    Too complicated- You don’t need your money spread out in 10 different ETFs. A smaller number of funds can do the trick.
    No bells and whistles- Some brokerages offer money market accounts, credit cards, or check writing. You don’t get any of that with Betterment.
    Lack of choice- this can be seen as a con. Some people want control over where their money goes.
    You can do it yourself- Investing isn’t as complicated as people make it out to be. I’m no expert, but after reading “A Random Walk Down Wall Street” and some other stuff, I’m fairly confident I could do this stuff myself.

    I will be staying with Betterment for some time because I know I’m my worst enemy and don’t want to fool around with things too much. But, I would recommend that people learn a little bit before making any choices. In the end, I have to agree with Andrew: the most important thing is that you’re doing something!

    • From our independent testing, Betterment IMHO is currently the best robo-advisor. So while LMM might sound like a commercial with their raving of Betterment I think it’s justified.

    • In our earlier episodes (nearly two years ago at this point) I was not nearly as smitten with Betterment. In fact, I actively pushed people towards managing their portfolios on their own.

      However, over time Betterment has really impressed me and they are simply relentless in their addition of new features. Simple things like making TLH+ available to everyone is extremely exciting even while most people wont know about or understand the positive effect it has on their portfolio.

      I do agree with all of your points except maybe the too complicated piece. In good times or in an all out collapse like 2008 I think you’re right but when you’re trying to isolate risk the variety makes sense. It’s hard to argue against proper diversification.

      Thanks for sharing some valid points and I also agree with myself – at least people are doing something ;)

  • Keith Snyder

    On the show, you guys mentioned that FutureAdvisor could manage money in an external account, such as a Fidelity account. It’s worth noting, however, that they can’t manage an active 401k account with your current employer, even if it is a Fidelity account.

    • That is true. Sorry if that wasn’t clear. They give guidance in what investments changes you should make in a 401(k).

      • Keith Snyder

        No worries. I enjoyed the episode. When you mentioned FutureAdvisor, I thought I had finally found a service that could do for my employer sponsored 401k (Fidelity Net Benefits) what Betterment does for my Roth IRA. Oh well, I guess the search continues.

        • No robo-advisor will make automatic changes to your 401(k) because of the way 401(k)s are setup. The only way this is possible is directly via your employer sponsored plan (ie via Vanguard). Currently, no one does this but I think we should expect this in the future. I would like to see Betterment offer 401(k) plans.

    • Excellent point Keith, thanks for adding that in!