Guide to Robo Advisory and Managed Portfolio Services
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I can invest easily and inexpensively with financial firms that offer robo advisory services and basic managed portfolios at entry points varying from $0 to $5,000. Portfolio design, add-on services, and pricing vary among firms. But the general idea is the same: investors can outsource day-to-day investment decisions at a relatively low price with automatically managed services.
Here’s a spreadsheet that outlines the basics of various services along with minimums and fees: Robo Advisors and Managed Portfolios.
Typically, there are two types of financial organizations involved in packaging and delivering portfolio management services. There are 1) advisory firms that develop and manage the portfolios and 2) brokerage and custodial firms that hold the assets and handle transactions associated with the buying and selling of ETFs and other investments.
Portfolio designs are based on Modern Portfolio Theory (MPT) or some form of asset allocation for diversification. MPT suggests that an investment portfolio diversified among major asset classes (stocks, bonds, etc.) will deliver the best possible returns at specific risk levels. Portfolios differ based on factors such as the investment philosophy of the advisory firm, the tax status of an account, and investor preferences.
Investment holdings are typically commission-free ETFs or low-cost ETFs though some hold mutual funds and cash. One holds individual stocks for direct indexing — though this is available for accounts with $100,000 or more. Portfolio re-balancing is free. Tax-loss harvesting services may or may not be available.
Fees are charged using the Assets Under Management (AUM) model. In this pricing model, firms charge an annual fee based on the account balance. This fee is often collected on a quarterly basis. Exceptions are smaller accounts that may be charged a monthly fee or no fee.
Getting started involves the following:
- visit a firm’s website
- choose the type of account (individual, IRA, etc.)
- respond to questions about risk tolerance, goals, and time horizon
- receive an investment recommendation of a diversified portfolio with an asset allocation designed to achieve certain goals at a specific risk level
- accept the suggestion or tweak the holdings (in some cases, tweaking is possible and in others, portfolios are not changeable)
- fund the account and begin investing
Money is invested in a diversified portfolio. Diversification enables investors to control risk but investment returns are not guaranteed. Any investing carries the risk of loss.
Robo advisory services and certain managed portfolios offer an easy way to invest. To compare services, check out this spreadsheet guide.
