New research from Morningstar Inc. suggests that all robo-advisers weren’t created equal.
While the vast majority of the top digital platforms have similar characteristics, like low-cost passive portfolios and long time horizons, there are big differences when it comes to cost, transparency and the depth of financial planning tools.
The latest study from the financial services firm found that top advice-oriented providers offer fairly comprehensive planning tools, ranging from online advice only to one-on-one human financial advisers who are just a phone call away.
Cost is another major differentiator, according to the research. While the median advisory fee for robos was 0.30% of assets per year, specific fee levels and how they are charged varied. According to the research, clients should consider how much money they're investing and whether they want basic advice or a more comprehensive plan when selecting which fee structure is best.
Of the 16 robo-advisers in the study, The Vanguard Group Inc. and Betterment ranked first and second, respectively, as a result of their low costs, broad range of financial planning tools and transparency. The actively managed and relatively expensive Titan Invest, and several wirehouse-affiliated providers, were rated as the least attractive because of higher costs and poor transparency.
“Digital investment advice can be a good option for smaller investors who may not be able to afford a traditional financial adviser,” Amy Arnott, portfolio strategist at Morningstar and lead author of the report, said in a statement. “However, there is work to be done on the level of transparency, higher fees in some cases, and financial planning tools that support investors with varied investing goals.”
Fidelity Go, Schwab Intelligent Portfolios, SigFig and Wealthfront Inc. also received above-average scores, according to the research.
Morningstar scored the providers on a five-point scale, along four dimensions, including: total price (30%); the process used to select investments, construct portfolios and match portfolios with investors (30%); the parent organization behind the digital platform (20%); and the breadth of services (20%).
While the robo-advice industry has opened up access to advice to a large swath of investors, robos have come under increased scrutiny from regulators in recent months. In November, the Securities and Exchange Commission released a risk alert and issued deficiency letters to almost every robo-adviser, citing shortcomings found in compliance programs, portfolio management — including acting in a client’s best interests — and performance advertising and marketing.
After years of playing catch-up and giving digital upstarts room to develop, regulators are ratcheting up their examination of digital platforms. In February, Wahed, a robo-adviser that operates under Islamic Shariah law, was charged by the SEC with making misleading statements and breaching its fiduciary duty, as well as with compliance failures. In 2019, Wealthfront and the now defunct Hedgeable were the first robo-advisers ever to be sanctioned by the agency.
“We hope this guide will make it easier for investors to choose a robo-adviser and encourage the industry to improve," Arnott said.
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