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Robo-advisor evolution: Making a great robo-advisor choice for building long-term wealth

Updated: Aug 20, 2023

Robo-advisors are an exciting, high-impact fintech investment alternative. We provide robo-advisor decision-making solutions and information sources to help you make a great decision.

We also make a policy suggestion for how the investment industry could take a page out of the consumer lending industry's regulatory playbook.


In The investment barbell strategy, we explore how robo-advisors should be an important part of your personal finance strategy. Robos are an effective way to get the most out of investing, at a lower cost and with lower minimums. Robos provide access to sophisticated investment strategies for a broader range of our society. According to Deloitte, a Global Advisory firm:

“By the year 2025 [the robo-advisor industry] is expected to rise to over $ 16.0 trillion assets under management (AUM), roughly three times the amount of assets managed by BlackRock, the world's biggest asset manager to date.”

To be fair, the Robo is not as friendly as a personal financial advisor. The Robo will not play a round of golf with you. Nor will the Robo provide a soothing voice to calm your emotions when the market gets choppy. But for most investment needs, the Robo is an effective investment solution and at a much lower price.

About the author: Jeff Hulett is a career banker, data scientist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at

Table of Contents

  1. Introduction - making the best robo-advisor decision

  2. Robo-advisors - a brief history

  3. Robo-advisor decision rules of thumb

  4. Robo-advising fees

  5. A fee shenanigans case study

  6. Conclusion

  7. Appendix - Lending as a regulatory model for investing

When choosing a Robo advisor, 2 kinds of resources are suggested:

First, prepare to make a decision. The following graphic shows the typical decision process, good for robo-advisors or any other decision. Definitive Choice is a low-cost, easy-to-use app. They have pre-configured investment advisor templates to get you started.

Second, get the facts. Use curated information resources that aggregate and synthesize robo-advisor data. The Robo Report from Condor Capital provides a wealth of performance information. Also, financial aggregators such as NerdWallet and Bankrate provide information, including robo-advisor costs. It is helpful to have a "one-stop-shop" list of relevant robo advisors. Your decision process from step one is necessary to help you quickly make the call on the best robo-advisor for you.

Order of operations matters. As such, defining your decision process first is essential for curating the data needed to make the best robo decision. Today's world is characterized by data over abundance. As such, deciding what data NOT to consider is essential for an effective decision process. Using a well defined decision process provides DECISION A-C-T:

  • Accelerated: faster, less costly decisions. It enables a nimble decision environment.

  • Confidence-inspired: process causes people to be more confident in the decision, increasing buy-in, and decision up-take.

  • Transparency-enabled: reporting, documentation, and charts to help communicate the decision.

2. Robo-advisors - a brief history

The first movers in this space were monoline fintech robo firms, notably Wealthfront and Betterment. At first, the big investment banks considered the monoline robos as a small annoyance. Over time, the robos got market traction. The big investment banks came to see them as an upstart competitor. Fast forward to today, robos are here to stay. The big investment banks have crossed the “If you can’t beat ‘em, join ‘em” chasm and have rushed in to stand up or purchase their own robos.

The big investment banks have some natural advantages the monoline robos do not. For example:

  • Capital. Massive capital for investing in robo-advising and potentially competing for robos as a “loss leader.”

  • Diversification. The most important diversification benefit is that many large investment banks have commercial banking subsidiaries or affiliates. These entities have bank charters with the ability to take deposits and make loans.

The on-point questions become about the way in which the big investment firms leverage their natural advantages. Do they leverage their natural advantages:

  1. In a way that reduces industry competition? - OR -

  2. In a way that lacks transparency for its clients?

For this article, we focus on transparent advertising and pricing practices. We believe advertising practices lacking transparency, besides being inappropriate for consumer clients, may lead to uncompetitive outcomes that benefit the large investment banks at the expense of the monoline robo-advisors. As a result, decision-making should prioritize 2 kinds of robo-advisors:

  1. Monoline robo-advisors, like WealthFront and Betterment. They are more likely to have transparent pricing.

  2. Robo advisors from ETF providers, like Vanguard or State Street. They are more likely to consider their Robo advisor as a means to provide their already low-cost ETFs.

In addition, the author has used Fidelity Go.

3. Robo-advisor decision rules of thumb

Well-diversified portfolios, like ETFs and broad market Mutual Funds, will perform like the market they index. For example, a low-cost ETF called 'the Spider' is indexed to the S&P 500 market index. It will perform like the broad market. Today, there are low-cost ETFs indexed to many markets, broad or narrow. As a result, our rules of thumb are:

  1. Decide on your initial risk tolerance first. To get started, it is recommended people with a 7+ year time horizon should initialize a high-risk profile. This simply means you are ok with higher volatility in exchange for a higher return. A long time horizon and diversification are your protection since broader markets are mean reverting over time. Even if a market takes a dip, over time, it will return to its upward trend. Once you get started, the Robo-advisors have tools to help you fine-tune your risk tolerance. Please see this article: Zoom out! A time-tested approach for investing in challenging markets for a great example of value-increasing mean reversion occurring after one of the largest market drops in history. Spoiler Alert: If you got scared out of the market in 2009, you missed out on massive value creation over the following decade.

  2. Focus on fees. Choose a robo advisor with access to low-cost ETFs and low AUM fees. I prefer robo-advisors that do not use their own mutual funds. Mutual funds have costs called "loads" that are not as transparent. Using owned Mutual Funds is like self-dealing. Monoline Robo-advisors are more likely to be independent. Financial aggregators such as NerdWallet and Bankrate provide Robo-advisor cost information. As we discuss below, some additional due diligence is needed when the costs seem "too good to be true."

  3. Do not get too hung up on performance. You are taking a long view. You are using broad market ETFs and mutual funds to guide your investment strategy. As such, shorter-term performance differences will get washed out over time. Only consider performance if there is reason to believe an ETF will underperform the indexed market in the long run. Most robo-advisors using market-indexed ETF's should perform fine in the long term. The Robo Report from Condor Capital provides a wealth of performance information.

4. Robo-advising fees

In terms of comparable robo-advisor costs, there are 2 main costs to consider:

  1. AUM fee – AUM is the investment industry jargon for “Assets Under Management.” Most robo-advisors charge a fee as a percentage of the assets they manage. Currently, the Robo-advisor market is around .25% annually. (Or, $2.50 for every $1,000 they manage.)

  2. The fee loads of the underlying funds the robo-advisor manages - Many robo-advisors use ETFs, which generally have very low loads (< .1%).

Both Wealthfront and Betterment, as of the writing of this article, have an AUM fee of .25%. However, Schwab does not charge any stated AUM fees. Your initial response may be “Yea! Great news.” Why would you use less-known robo-advisors when a better-known brand like Schwab does the same thing and for no cost? Upon reflection, you may be skeptical, as I was. You may then ask, “If Schwab does not charge anything, how do they stay in business? Is there another way they are making money?” In the next case study, we show how Schwab's costs are actually determined and that their costs are actually higher than most.

When it comes to evaluating costs, I would not spend too much time researching. Starting with the earlier named Robo-advisors, look up the 2 primary costs mentioned above - AUM Fees and average fund loads. If one of your robo-advisor choices makes it challenging to determine fees, eliminate the option and move to the next one.

For fee loads, as a rule of thumb, choose robo advisors with a higher proportion of ETFs than Mutual Funds. In general, ETFs have lower fees than mutual funds. You may also dig into the load fees of the individual robo-advisor funds. Please see the following Google search "lowest load etfs and mutual funds." Keep in mind, robo-advisors use many ETFs and mutual funds. It is suggested to consider the load costs of a few of their largest funds.

5. A fee shenanigans case study

Next, we provide the case study for how Schwab makes money on their robo-advisor. Their practice is certainly walking a fine line - approaching deceptive. The reader can decide for themselves which side of the deceptive line their practices are found. Feel free to leave a comment! This is also the premise for why “Truth In Investing”-based regulations required for lenders would also be very helpful for robo-advisors. We discuss this in the appendix. It is handy to have one cost number to make pricing comparisons easy. As it stands at the time this article was written, the consumer needs to do a little more homework when deciding on a robo-advisor. That is ok. Get cost information by looking up the 2 main costs mentioned earlier.

Based on their website example, Schwab sweeps about 8% of client AUM into a low-interest-bearing bank account. Schwab uses this very cheap, FDIC-insured money to make loans and other investments for itself. If the long-term average annual yield on the investment strategy is 11.5%, that means the effective AUM fee is .92%. [(long-term yield – deposit yield)*cash sweep %] Please note, we use Schwab as an example. Other large investment banks, with affiliated commercial banks, utilize a similar strategy.

Here is the important part - this AUM fee difference between the monolines and some big investment banks, known as the opportunity cost value, is not available for the long-term time value of money customer benefit. (We discuss the opportunity cost impact in the appendix. The example shows a VERY significant long-term impact of over $4.5 million!) Other robo-advisors invest 100% of client funds in the investment strategy. The Schwab practice is concerning because:

  1. The effective AUM fee is hidden in the cash account and is over 3x monoline robo-advisors.

  2. From a liquidity standpoint, an investor would not use a robo-advisor to hold cash because the investment strategy, by definition, is illiquid in the short term. It is like getting the worst of both worlds --> a) getting a super low or no yield on cash AND b) not having direct access to cash liquidity.

  3. Sweeping cash, intended for an investment account to an FDIC-insured bank account, is not the intent of the FDIC. Investment money is “at-risk” and is not intended for the FDIC to insure. The use of the FDIC-insured bank deposit in this way --> a) puts the nonbank robo monoline at a competitive disadvantage and b) creates an unintended liability for the FDIC.

David Goldstone, CFA is from the Backend Benchmarking firm. They publish "The Robo Report" and provide robo-advisor benchmarking services. Mr. Goldstone noted:

“I agree, even if it is disclosed that a robo is using a cash sweep to generate revenue (Schwab does disclose it) I still think it is a hidden cost and creates a real transparency issue.”

Robo-advising is a direct-to-consumer activity. This means there are generally no brokers to facilitate a transaction or otherwise help the client. Also, in the banking or broker-dealer legal environment, consumer-based clients have much higher protections than business-based clients. In effect, businesses are expected to have more capacity to fully understand investment agreement implications. Whereas consumers are generally expected to need more help understanding investment agreement implications. There are no “Truth In Investing” disclosure requirements helping consumer investors like consumer lending regulations like "Truth In Lending" helps consumer borrowers.

6. Conclusion

Robo-advisors are an exciting, high-impact fintech investment alternative. As the robo-advising industry matures, industry participants appear to charge significantly different fees. In some cases, the fees lack transparency. We provided a straightforward approach to quickly evaluate the 2 main robo-advisor fees. We provide an example where the robo-advisor fees are hidden in required cash balances. We believe a “Truth In Investing”-like regulatory regime, modeled after the long-existing Truth In Lending Act, would be helpful to provide consumer transparency, consumer comparability, and a level competitive playing field.

To help organize your robo-decision criteria, criteria data, and robo-advisor alternatives, consider using a decision recommendation solution like Definitive Choice. Once your decision process is defined, consider using robo-advisor information aggregators.

7. Appendix - Lending as a model for investing

As a long-time mortgage lender and consumer lending risk management leader, “Truth In Lending” or Regulation Z has been a high-impact part of my professional life. The Truth In Lending Act (or “TILA”) was enacted in 1968. According to the Office of the Comptroller of the Currency (the “OCC”), a national bank regulator, the purpose of TILA is:

“[The act] protects you against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.” – (bold emphasis added)

The implementation of TILA occurs in multiple ways. Lenders must disclose all costs. For mortgages, costs are typically disclosed on the standard “Closing Disclosure” form. Also, costs are rolled up into a single, comparable, cost of credit metric called the Annual Percentage Rate (or “APR”). According to the Federal Reserve:

“The APR is a measure of the cost of credit, expressed as a nominal yearly rate. It relates the amount and timing of value received by the consumer to the amount and timing of payments made. The disclosure of the APR is central to the uniform credit cost disclosure envisioned by the TILA.” – (bold emphasis added)

Today, there is no “Truth In Investing” disclosure requirements like TILA.

So why wouldn’t investors have similar protections as borrowers?

The cash sweep impact

At this point, you may be thinking:

“OK, I get it. The robo cash sweep lacks transparency. But is it material? The difference between .92% and .25% seems really small.”

In a long-term investment strategy, like for our retirement, the investment value difference is huge. We model the investment value difference after our career-focused persona named Liam. Liam is a college-educated worker that actively manages his career. Liam can choose either a) a higher cash sweep effective AUM fee robo-advisor like Schwab or b) a lower effective AUM fee robo-advisor like the monoline robos. For Liam, the modeled difference between the two different AUM fee strategies is $4.5 million at retirement. Please note: The model is available for download and found at the end of this article.

The assumptions are that Liam will steadily invest with robo-advisors, starting in his 20s. Liam will consistently increase the invested amount as he progresses through his career. The assumed average annual yield is 11.5%. The $4.5 million is the retirement difference between a robo that charges .25% of AUM v. a robo that sweeps cash in a way where their effective AUM cost is a higher .92%. A seemingly small difference in AUM fees creates a very large difference in long-term value.

Making a good robo-advisor decision

Over time, as the industry and legal environment evolve, robo-advisor information will continue to improve. As mentioned earlier, "The Robo Report" and the Backend Benchmarking website contain data for cost, risk, and return criteria and across most robo-advisor alternatives. The question then becomes, what is important to you? How do you weigh the criteria and the alternatives in a way that provides the "best" robo recommendation, tailored to your preferences? It is one thing to have the information from "The Robo Report" but another thing entirely to calculate all the criteria and alternatives in a decision-informing way.

Definitive Choice is a smartphone app decision solution for robo-advisors and many other life decisions. It provides a straightforward user experience. The number-crunching occurs in the background by time-tested decision science algorithms. It uses a proprietary "Decision 6(tm)" approach that organizes the criteria (what is important to you?) and alternatives (what are the choices?) in a series of bite-size ranking decisions. Since it is on your smartphone, you can use it while you are reviewing research from "The Robo Report" or other sources. It is like having a decision expert in your pocket. The results dashboard provides a rank-ordered list of recommended "best choices," tailored to your preferences.

Also, Definitive Choice comes pre-loaded with many templates, including the Investment Type Selection. You will want to customize your own investment criteria and robo alternatives, but the preloaded templates provide a nice starting point.

The Stoics Arbitrage robo opportunity cost
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