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This is part one of a three-part series. In parts two and three, we will evaluate Albert, Stash, Ellevest, and the offerings from Goldman Sachs, Merrill, Vanguard and Schwab.
Those who do not have the workplace infrastructure to help save for retirement can benefit from digital advice.
With so many robo-advisor choices, individuals are struggling with which one to use. Robo-advisors are great for the “do nothing,” or passive, approach to investing. The “do nothing” approach says that you pick your investment strategy once, which the robo-advisor can do for you based on your answers to a few questions, and then leave it alone. You do not actively trade, rebalance, or shift your strategy. You could look at it maybe twice each year to see if it still makes sense with your goals. But in general, if you answer the questions correctly in the robo-advisor platform, and those answers remain the same, then the robo strategy should be in line with your goals.
Besides the fact that robos help you “do nothing,” they also help you contribute in an automated way. This is perhaps even more important than the “do nothing” approach. The reason why people find it easy to save in a 401(k) is because it is automated from their paychecks. Even more helpful is the fact that they are often defaulted into contributing by their employer. If you do not have that infrastructure, perhaps because you are a gig worker, then you need to set up something for yourself.
Digit is a particularly useful robo-advisor for gig workers. It allows an individual to save for different things, whether it be a vacation in the near future or for retirement. It also takes money from your account automatically as income is earned and moves it into a separate account based on your goals of how much you want to save. If you need it to be adjusted because it is taking out too much or too little money, you can go in and tell this to the app and it becomes smarter. What is great about Digit is that it requires little analysis by the user. If you are going to use Digit for multiple features, such as investing for different purposes, then the $5 per month is likely worth the cost.
A similar, but slightly less holistic, option is Acorns, which charges $3 per month. Acorns can either save based on your transactions (e.g. investing the change from a purchase) or based on contributions every week or every month; it can do so as cash or in a retirement account. What Acorns does not do, unlike Digit, is save based on when you receive income. Acorns could encourage spending by making you think you are saving when you spend but remember that on average, you are spending more than you save on each purchase transaction. So, if you are going to get that Starbucks coffee anyway, it is great to round up the change and invest it. But if you're getting the coffee because you think you're helping your savings, that rationale does not really work!
What is nice about both Digit and Acorns is that their pricing is very transparent – a subscription model. However, if you were to compare them to the more established robo-advisors, Betterment and Wealthfront, they are more expensive for smaller account sizes. Betterment has pricing plans with no fee, .25% annually, or .40% annually, and Wealthfront charges an annual fee of .25%, deducted monthly (so may lead to a slightly different charge than Betterment) on all assets under management.
Consequently, if you are investing, say $2,000 a year, here is what a fee comparison might look like:
If you are investing $20,000, here is what a comparison would look like:
Thus, for simply saving for retirement at regular intervals, e.g., weekly or monthly, the established robos are cost effective until you get to larger account balances. As you get into greater account balances or want greater functionality, e.g., budgeting more generally with Digit or saving with your purchases with Acorns, the subscription robo-advisors provide more bang for your buck. Whichever you choose, using a robo-advisor is certainly better than not doing it at all and procrastinating in hopes of one day figuring out the perfect strategy. We focus here mostly on cost, because it is one of the biggest predictors of long-term returns. It is a critical component in your choice. Of course, the right robo-advisor for you is the one you will actually use. Future pieces will examine other aspects of robos aside from cost. In the meantime, choose one and start saving today!
Jasmin Sethi is the CEO of Sethi Clarity Advisers (SCA), a boutique consulting firm providing expert regulatory and business strategic advice to companies in the financial services industry. As a Harvard trained lawyer-economist, she is a thought leader on issues pertaining to how the asset management industry and financial regulation impact ordinary individuals, and particularly, freelancers.
Megan Gallagher is a research associate at SCA and will be graduating from Brooklyn Law School next year. She is joining the Capital Markets group at Linklaters LLP’s London office upon graduation.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
