Robo-Advising Firms: Creative Marketing or Real Value?

robo advising firms creative marketing or real value

The Robo-Advisor Alternative

Over the past few years, robo-advising (virtual investment management) has begun to gain traction as a viable alternative to the traditional financial advisor model. Popular robo-advisors, such as Betterment, Future Advisors, and Wealthfront have promised to revolutionize the industry by cutting costs to investors. Traditionally, financial advisors charge fees in the form of expense ratios, all-in-costs, asset management fees (AUM), maintenance fees, percentage fees, trading fees, transaction fees, redemption fees, and commissions to name a few. The average advisor takes a percentage of about 1.25% from each investor’s portfolio. So how did robo-advisors change this model for investors? Essentially, they’ve cut the percentage down to approximately 0.5%. Instead of changing the model in any way, they’ve simply lowered the cost. Unfortunately, this by no means mends a broken industry. The model is the same and the problem remains: percentage based pricing hurts investors.

Be Wary of Bait-and-Switch Marketing

The most important thing we can do as investors is understand everything about the fees we are incurring: what are they and what are they for? When switching to robo-advising platforms, the most exciting promise made to us is that we will be spending less money for the same results we would have received with a traditional advisor. This is when it is especially important to understand exactly how much money you will be paying your online firm. If it’s a percentage-based fee, are you willing to accept that more money will be taken out of your account as your portfolio becomes more successful? Are you willing to accept that the same technology, portfolio recommendations, and model will be applied to all accounts but the fees will vary? When choosing a robo-advisor, carefully examine what each company has to offer. Additionally, be wary of any firm that claims there will be no fees at all. Some robo-advisors (like WiseBanyan and Charles Schwab) claim on their websites that their services are 100% free. However, if you look the companies up on SEC.gov, you will discover how they make their money and what kind of fees they actually do charge. As the SEC requires companies by law to disclose this information, you’ll be able to see the business’s true nature without any smoke and mirrors marketing. Doing some research on your robo-advisor firm beforehand will ensure you stay protected from hidden fees.

New to FC360?

At FC360, we believe when you accumulating wealth that your portfolio’s success should be yours alone. That’s why we offer a low cost indexing platform which only charges a flat fee for investment advice. Our pricing is simple and straight-forward. For accounts over $20,000, we charge $15 a month. This means no matter how much your portfolio grows, you will only ever pay $180 a year per account. To encourage beginner investors (accounts under $20,000) we’ve lowered the monthly price to $3. Request your free wealth management consultation today.

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