What Exactly Do Online Investment Advisory Services Offer?

Among the financial industry’s latest innovations are online investment services.

Essentially, these firms eliminate the costly in-person relationship between an investor and his or her financial adviser by automating the process, thereby allowing more clients with less assets to be serviced profitably. Some of these services specialize in a particular area of financial expertise as opposed to commandeering the financial adviser role all together. Either way, these online services, for the most part, remove the person-to-person aspect of receiving investment advice, portfolio management service, asset allocation analysis or other services of that nature.

Before getting into a discussion of what’s offered online, it is worth mentioning that whether you go with an online advisory service or a traditional in-person adviser is all about preference. It is a different experience either way.

At the other end of the spectrum, we have traditional in-person financial advisers. Just because you can see them and talk to them directly, however, doesn’t mean they are more trustworthy. Some people enjoy meeting with someone in person, but for others that isn’t the most important part. An “in-person” adviser may be able to provide a broad range of advisory services and investment options, but this level of support normally carries higher minimums or fees.

We asked Allen Carter, executive director at UBS in Chicago, what he thought differentiates an in-person wealth manager/adviser from an online service. His response was, “The value of developing a close and personal relationship with a wealth management adviser cannot be overstated. Every client has a unique world view, a distinct set of needs and very different preferences as it relates to risk and investments. A robust partnership between a high-quality adviser and a client can make a huge difference over time not only as it relates to potential investment returns but more importantly in the landscape of trust, planning and in addressing the unforeseen. An online service completely misses the heart and soul of the matter which, of course, is the relationship.”

This feeling resonates with many individual investors. However, more have been putting their money into online investment services.

Don’t Call Them Robo-Advisers

The term robo-adviser has often been used to describe online investment services, but it was interesting to find out that many of these firms aren’t too fond of the label. Here’s why.

The Hedgeable service doesn’t like the term robo-adviser because “it infers a commoditized, mass-produced, cheapened product. This is what a robot does.” Wealthfront opposes the term as well: They feel that robo-adviser has been “adopted by the traditional financial adviser community and isn’t used by any consumers.” Personal Capital doesn’t care for the term simply because they’ve built their business around a traditional adviser relationship.

The folks at Covestor, on the other hand, aren’t offended by the term. They just feel that it doesn’t capture a fair representation of their service, which is more of a hybrid model. Their portfolios, although online, are managed by human portfolio managers. TradeKing Advisors feels similarly—the company stated, “While the term ‘robo’ doesn’t bother us as it has come to be synonymous with high efficiency and accessibility, we consider the TradeKing Advisors’ offering to be more in line with the term ‘online advisory’ because we have highly experienced professionals creating and weighting the portfolios.” Betterment also feels that the term robo-advisers doesn’t properly explain their service, but the firm doesn’t oppose it.

Some firms didn’t comment on the subject.

Okay, so what should they be called? Based on the feedback we received, most firms prefer online advisory service, automated investment service, digital wealth management or digital asset manager.

The whole concept of trust drives the financial adviser–client bond, and many online advisers believe a label like robo-adviser may be perceived as less trustworthy. But keep in mind that just because an actual human is doing your financial grunt work for you, as opposed to a computer, does not necessarily make the process more trustworthy. Human beings may be motivated by incentives and hidden agendas that computers aren’t prey to, so neither type of service should be judged as more or less trustworthy than the other.

What the Services Offer

What you can get from an online investment service depends on your preference and needs. A wide range of services is available; Table 1 summarizes the features, offerings requirements and fees of the 13 services that responded to our inquiry.

Table 1. Online Investment Services

	Features	Port- folio  Review	Secur- ities	Tax Guid- ance	Retire- ment Withd- rawal Guid- ance	Mana- ger of Money	Staff Commun- ication	Licen- sing Require- ments	Fees	Mini- mum Account Size
Asset Builder	portfolio/ asset mgmt		mutual funds			firm	email, phone, in person	Series 65	0.20%- 0.45% of AUM	$50,000
Betterment	financial advising, broker/ dealer		ETFs			firm	phone, email, app	none	0.15%- 0.35% of AUM	none
Covestor	investment platform		stocks, ETFs			firm	email, chat, phone, Skype	Series 66	0.00%- 2.00% of AUM	$10,000
FlexScore	financial planning platform		na			client	platform, email, iOS app	none	free	none
Hedgeable	account mgmt platform, focus on risk mgmt		stocks, ETFs			firm	platform, email, phone	none	0.05%- 0.75%	$5,000
Jemstep	portfolio mgmt & analysis, transaction recomm- endations		mutual funds, ETFs			client	email, live chat,  support forum	none	free- $69.99/mo.	none
Liftoff by Ritholtz Wealth Management	financial planning, asset allocation		ETFs			firm	email	Series 65	0.40%/yr	$5,000
Motif Investing	online brokerage firm		stocks, ETFs,  ADR, CEFs			client	email, phone, iOS app	none	$9.95 transa- ction fee	$250
Personal Capital	wealth mgmt, investment planning, free financial software		stocks, bonds,  ETFs			firm	phone, email, text, video-confer- encing, in person	Series 65/66	0.49%- 0.89%	$100,000
Rebalance IRA	retirement investment advice		ETFs			firm	website, phone, email, video-confer- encing	Series 65	0.50% of AUM	$100,000
TradeKing Advisors	Investment advising,  portfolio mgmt		ETFs			firm	phone, online chat, email	none	0.25%- 0.50% of AUM	$5,000/ $25,000
Wealthfront	Investment mgmt and advice		ETFs			firm	website, phone, app	none	0.25% for >$10k	$5,000
WiseBanyan	financial advising, portfolio mgmt		ETFs			firm	phone, email,  web messages	none	free	$10

Depending on the firm, you can receive access to portfolio management, asset management, investment advising, financial planning, portfolio analysis, online brokerage, asset allocation and more. Each firm is geared toward their own services.

If you want an online advisory service to manage your investments for you, check out Asset Builder, Betterment, Covestor, Hedgeable, Liftoff by Ritholtz Wealth Management, Personal Capital, Rebalance IRA, TradeKing Advisors, Wealthfront or WiseBanyan. What does “manage your money for you” mean with an online service? Most of the firms choose an asset allocation based on a questionnaire that you fill out online; others allow you select the model portfolios that you will use.

For example, Betterment, according to their website, “starts by giving advice based on time horizon and building you the right customized portfolio for each goal.” Clients can choose from such goals as building wealth, retirement, safety net, IRA or retirement income. Hedgeable is similar in that they manage your money for you. When you open an account with Hedgeable, you are hiring them as your investment adviser and providing them with discretionary control to input buy/sell orders for their broker-dealer to execute on your behalf, based on your investment preferences.

Personal Capital can also manage your money for you. The firm is unique in that it offers a wealth management service as well as free financial software. The financial software is a one-stop-shop for all your financial accounts and gives you insights on your investments, cash flow, savings and more. The investment checkup feature calculates your current asset allocation across all accounts and tells you what you can do to improve your risk-adjusted returns. For those with more than $100,000 to invest, Personal Capital offers wealth management, where advisers work one-on-one with clients to develop and implement long-term investing plans.

Covestor is different in that the company is a marketplace representing over 100 portfolio managers. After undergoing an “ongoing vetting and monitoring process,” managers are invited to become a part of Covestor. The service then helps connect you to one or more portfolio managers that fit your investment style. You can see every portfolio manager’s track record, including their positions and trades. The portfolio manager makes trades for you. Clients can switch portfolio managers at any time without penalties. Essentially, once the account is opened, Covestor’s Portfolio Sync software automatically replicates in your account the trades made by portfolio managers with their own money in their own accounts.

Some of the firms are specifically geared toward retirement. Jemstep, for example, gathers information regarding your projected retirement income, savings rate, retirement accounts, investing approach and more. Based on your needs, the service provides you with an action plan of exactly what you should buy, sell and hold to build your optimal portfolio.

Rebalance IRA is another service that takes a more retirement-oriented approach. They custody investor assets at Schwab or Fidelity and have discretion over the account. So essentially, you keep your money in a Schwab or Fidelity account and Rebalance IRA manages the money for you. The service identifies what your risks and goals are, takes a holistic approach by viewing all of your assets, and then recommends a proprietary portfolio and long-term plan. Rebalance IRA pairs every client with a dedicated adviser who monitors your investments and rebalances for you.

FlexScore differs in that it is an online financial planning platform that aggregates users’ data across a range of areas—insurance policies, retirement plans, estate plans, savings, debts and investments—and then creates an overall score. From there, each investor will receive a list of personalized tips in order to improve their overall financial well-being.

Another differentiated service is Motif Investing. Motif Investing is a concept-driven online broker that allows individuals to invest in low-cost, customizable stock portfolios called motifs. A “motif” is an intelligently weighted basket of up to 30 different stocks based on a specific theme, strategy or idea. Investors pay only a single transaction fee to invest in a particular motif. There are a wide variety of prebuilt options to choose from and investors can create their own motif as well. Benchmark motifs have different scheduled rebalance frequencies based on the portfolio thesis and construction; however, most motifs are rebalanced quarterly. Investors are notified of any rebalances to motifs within their portfolio and can choose to follow along with a rebalance at any time.

Similarities

One similarity that we noticed between the firms is the use of ETFs (exchange-traded funds) and fractional shares. Fractional shares are partial share holdings, similar to the way mutual fund shares are allocated. Typically, individual investors can only buy or sell a full share of an ETF unless they are participating in a dividend reinvestment program. These firms are changing that model by allowing investors to buy and sell less than one share. The advisory firms allocate the partial interest among client accounts. Fractional shares are also available for dividends, though they may not be eligible for voting rights.

Eleven out of the 13 companies we talked to use ETFs to implement investment strategies. Some also employ stocks and mutual funds, but several use only ETFs. This is why they are able to keep the fees low, and the management intervention low as well.

Differences

Of the companies that invest your money for you, some use programmed trading and others actually have people trading your account.

• Programmed trading: Hedgeable, Liftoff, Wealthfront, WiseBanyan
• Non-programmed trading: Asset Builder, Covestor, Personal Capital, Rebalance IRA, TradeKing Advisors

Wealthfront uses software programs to do the trading, but the company employs several Ph.D.s and CFAs who advise on the overall direction of its automated investment strategies. Personal Capital trades are implemented by its portfolio management team, who are assisted by sophisticated asset allocation algorithms. As mentioned before, Covestor employs somewhat of a “mirrored” investing approach. The trades in your account are made by software, but the software is designed to replicate the investment decisions and trades made in the portfolio manager’s account. Betterment did not respond when asked how trades were implemented.

Also, not all of the companies give advice regarding retirement withdrawals or tax. If you are looking for tax guidance, check out Betterment, FlexScore, Jemstep (general guidance) or Personal Capital (tax optimization). If you are looking for retirement withdrawal guidance, check out Asset Builder, Betterment, FlexScore (general guidance), Jemstep (general guidance), Personal Capital or Rebalance IRA.

As we mentioned previously, communication is something you should be particularly concerned with. How easy is it to contact the firm if you have a question, comment or concern? They are managing your money, after all. Based on the companies we talked to, only two have actual brick-and-mortar stores: Asset Builder and Jemstep. Jemstep’s model is slightly different, though. The company partners with registered investment advisers (RIAs) to offer a more traditional advisory service to their prospects and clients. Accessing the service through an adviser enables you to talk with an adviser or visit the office of that adviser. Table 1 shows that Covestor doesn’t allow in-person meetings; this is simply because if you want to visit them, you would have to travel to their office in Boston’s financial district. Whether you can meet with someone in person is one of the biggest differences between online investment services and traditional advisers.

Most of the services can be reached via phone and email, according to their statements. Several firms also offer Skype services or video-conferencing, including Covestor, Personal Capital and Rebalance IRA. How easy it is to reach an actual person with investment questions, we do not know, but it likely varies by firm.

Of the companies we spoke with, a handful of them were registered investment advisers (RIAs) with the Securities and Exchange Commission (SEC): WiseBanyan, Covestor, Asset Builder, Personal Capital and Jemstep. TradeKing Advisors has portfolios that are constructed, monitored, and rebalanced according to Ibbotson Associates, which is an RIA as well.

What the Services Charge

Look out for the fees. Some of the services say there aren’t any management fees, and some companies say you won’t have any fees up to a certain point. These companies include FlexScore, Jemstep, TradeKing Advisors (free first year), Wealthfront (no fees on first $10,000) and WiseBanyan.

But this doesn’t mean that you won’t be charged if you are investing in ETFs that charge fees. Most companies also specify that they target only low-cost ETFs. What is “low cost”? Make sure you are aware of the fees regardless. Don’t just look at the words low-cost and think you know what type of fees to expect. You can also find out what ETFs your money is going into and then look up those specific funds to see the fees for yourself.

The companies that actually manage your investments for you typically charge management fees. Most companies give a range of fees, typically based on assets under management (AUM). As long as you are aware of your holdings and the rate you are being charged, you should be well prepared for the management fees. Keep track of what you are being charged (as with anything else).

According to Cerulli Associates, the majority of traditional adviser fees based on client asset level are:

Based on the information in Table 1, online investment services’ fees range from free to 2%, with 85% of the services featured in this article having fees of 0.75% or lower. This is equivalent to the charge for a $10 million account with an in-person adviser.

According to our 2014 Guide to ETFs, which was published in the August AAII Journal, fees for the 15 largest exchange-traded funds range between 0.05% and 0.67%. Long-term government bond ETFs have an average expense ratio of 0.41%, corporate high-yield bond ETFs have an average of 0.50%, foreign stock ETFs charge an average of 0.48%, small-cap stock ETFs charge 0.30%, mid-cap stock ETFs charge 0.40%, and large-cap stock ETFs charge an average of 0.40%. This gives you a feel for the types of fees that you will be seeing from ETFs, on top of any managerial fees for using a financial adviser, whether online or traditional.

Questions to Ask

That these investment services are online may be a concern for investors who are not computer-savvy. When we surveyed these companies, it was important that they—at the very least—had some sort of ability to be contacted by the telephone. If an advisory firm is going to manage hundreds of thousands of dollars for individuals, it should be easy to get a hold of.

Some online advisers didn’t even have easily accesible emails. In some cases, we got the impression of “Give us your money, but no, you can’t get a hold of us if you need help.” That being said, not all companies were this way.

Here is a quick list of what to look for if you are going to go the online investment service route.

1. Read the “About Us” Section

Is this section of the website vague? Some websites give you the bare minimum when it comes to information about what they do or how they manage your money. Make sure that the website has a lot of information. Ask questions like:

• What are the basic services I will receive?
• How often is the portfolio reviewed?
• Who invests in the portfolio? Am I or is the company doing the actual investing?
• What is the minimum amount required to invest?
• What kinds of fees can I anticipate incurring?
• What type of communication can I expect? (telephone, email, etc.)
• What types of securities will you be investing in or recommending?
• Is tax guidance provided?
• Is guidance on taking retirement withdrawals given?
• What are the advisers’ licenses?

2. Read the FAQ section

Look through “popular questions” that many other investors had have. This section typically proves to be very insightful.

3. Think about what services you actually need and see if they offer them. Do not make exceptions.

If you need tax guidance and the advisory firm doesn’t provide it, don’t go that route. If you are more concerned about risk management, but the adviser doesn’t look at your risk tolerance when deciding asset allocation, run away.

4. Make sure you have constant access to your account information and monitor all the transactions.

Some of the companies we spoke with didn’t specify how often they send investors updates on their portfolio. You want these updates. If they are making moves with your money and you’re not aware of what is going on, that’s bad news.

Conclusion

Keep in mind that an online investment service can only work with the information given to them. They form a plan based on the inputs provided.

All the companies mentioned in this article were very forthcoming regarding the services they offer and what they can do to help the individual investor. If you have any questions, contact them.

As a final note, there were some firms we contacted that did not respond, responded briefly and never followed up or chose not to participate. These were: Financial Guard, LearnVest, Folio Investing, SigFig, Edelman Financial Services, Future Advisor and Market Riders.