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9 Things to Know About Robo Advisors

By U.S. News & World Report

Automate your investing with robo advisors.

Robo advisors have become a popular option for American investors who prefer an actively managed account without the expensive fees associated with hiring a human manager. Robo advisors are digital account management services that utilize trading algorithms rather than human input to actively buy and sell stocks and other assets. For investors lacking an advanced understanding of how the market works, robo advisors make normally difficult investing decisions automatically based on changes in market conditions. The software also provides helpful account maintenance procedures such as automatically reinvesting dividends and re-balancing portfolios. Here are nine things investors should know about robo advisors.

Robo advisors are cheap.

Robo-advisor services are much lower-cost than their human counterparts. For example, leading robo-advisor service Wealthfront offers its services free of charge for clients’ first $10,000 in assets and then charges only 0.25 percent in fees above that threshold. By comparison, traditional advisory services from Buckingham Asset Management cost clients up to 1.25 percent in fees annually. Robo-advising services are certainly low in cost, but investors need to understand there may not be a human being monitoring and protecting their portfolio. In addition, while algorithms sound impressive, they are only as good as the experts that design them.

Robo advisors can help minimize tax losses.

Taxes can take a major bite out of investment returns, especially in actively-managed portfolios. Robo-advisor services like Wealthfront advertise tax-loss harvesting, a trading strategy that involves selling losing stocks and replacing them with similar stocks in the portfolio. This strategy allows investors to benefit from writing off investing losses while remaining fully invested in the same long-term strategy. Active managers have been taking advantage of tax-loss harvesting for decades, but the process is now fully automated and available to retail investors for a fraction of the cost a human manager would charge.

Robo advisors have limited flexibility.

While leading robo advisors have customers answer questions to choose the best type of investing strategy for each individual, they can only go so far in customizing their algorithms. Clients can set and even edit preferences, time horizons, goals and other variables. However, financial planning can be so overwhelming and complex that some clients may benefit more from regular discussions with a human advisor. Human advisors can also help clients deal with the emotional challenges of investing, such as riding out short-term market volatility. Robo advisors don’t necessarily have the human touch when it comes to reassuring customers.

Investors are skeptical of robo advisors.

Despite a meteoric rise in popularity, a recent survey by LendEDU found that a large number of millennial investors don’t fully understand how robo advisors work and are skeptical of their performance. Only about 25 percent of the 500 investors polled reported using a robo-advisor service. Among those that were not robo-advisor customers, 62 percent of respondents said they didn’t even know what a robo advisor was. Two-thirds of millennials believe a robo advisor is more likely to lose their money than a human advisor. Roughly 70 percent felt a human advisor would deliver a better return than a robo advisor.

Results may vary.

A study by Condor Capital Management found that investment returns from robo advisors can vary significantly. In 2016, Condor tested the performance of nine top robo-advisor services by opening up accounts at each company. The firm customized preferences based on a hypothetical investor in a high tax bracket with moderate risk tolerance who is anticipating retirement in 20 to 30 years. Full-year performance ranged from a 10.7 percent gain for Schwab to a 5.5 percent gain for Vanguard. For comparison, the Standard & Poor’s 500 index delivered nearly 12 percent total return on the year.

Robo advisors haven’t been truly tested.

The algorithms driving robo advisors have strong track records delivering consistent annual returns. However, it’s important to remember that leading robo-advisor services are so new that their track records don’t include the financial crisis of 2008 or other recessions. Sure, these services have performed well for the past eight years or so, but the stock market is up nearly 150 percent in that time. Even a portfolio of stocks selected at random would likely have performed relatively well during that stretch. The first true test of the viability of robo advisors may not come until the next U.S. recession hits.

Robo advisors are easily accessible.

Most human fund managers require clients to have at least $100,000 in assets. However, investors can typically qualify for robo-advising services with $5,000 or less. Betterment, one of the most popular robo-advisor services, has no account minimums. Wealthfront even encourages smaller investors by managing clients’ first $10,000 free of charge. Historically, investors with modest savings had limited options when it came to money management. Today, robo advisors are available to anyone with an internet connection. As more services pop up, investors can expect competition to drive promotional deals as well, making it even more appealing to open an account.

Algorithms are based on Nobel Prize-winning theories.

Each robo advisor has unique trading algorithms that deliver varying results, as the Condor study proved. However, most of the algorithms are derived from generally accepted investment theories focused on minimizing risk and maximizing return. When Eugene Fama and Robert Shiller won the Nobel Prize for economics in 2013, robo-advisor Betterment revealed that its algorithm “relies on many of their insights.” Betterment and Wealthfront disclose that they use the same principles of modern portfolio theory that earned economist Harry Markowitz the Nobel Prize in 1990. Robo advisors may be computer programs, but their strategies are based on sound human logic.

Robo advisors manage $224 billion and counting.

Global robo advisors already account for more than $224 billion in total assets under management, according to a 2017 report by Statista. That number is expected to grow by 47.5 percent annually and exceed $1 trillion by 2021. Statista estimates that nearly 100 million people will use robo-advising services within the next four years. With more than $47 billion in assets under management, Vanguard is by far the largest robo advisor in the world, followed by Schwab Intelligent Portfolios ($10.2 billion), Betterment ($7.3 billion) and Wealthfront ($5 billion). According to B.I. Intelligence, the U.S. alone has more than 200 different robo advisors.

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9 Things to Know About Robo Advisors originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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