For the last several years, I’ve been writing and speaking about the challenges that advisors face, particularly in the area of investments. The vast majority of advisors I meet tell me that their firms add little if any investment alpha after expenses and taxes, yet most firms appear to spend a significant portion of their time and technology budgets on investment-related tasks such as risk assessment, asset allocation, investment selection, investment monitoring, rebalancing, etc. This has led to advisors’ increased interest in digital advice platforms—otherwise known as robo-advisors. Just two years ago, virtually every advisor I spoke with viewed these as a passing fad. This is no longer the case. Today, most advisors are interested in the platforms, and the majority of firms appear to be thinking of incorporating them into their practice.

I assumed these advisors would have taken time to evaluate the retail robo-solutions they would be competing with. So I was shocked at a recent conference when a speaker asked how many of the audience members had studied the retail offerings, and I was the only person to raise a hand.

So for this month’s article, I selected two direct-to-consumer retail robo offerings to profile. Rather than look at relative newcomers, I decided to try out offerings from two firms with well-known brands and ample marketing budgets: E*Trade and Fidelity.

E*Trade
The E*Trade offering is called “Adaptive Portfolio.” It currently has a minimum investment of $10,000, and the annual management fee is 30 basis points. At the time of this writing, E*Trade was waiving the advisory fee for the first six months and offering a cash credit of $100 for those depositing or transferring $10,000 in new funds to an Adaptive Portfolio account. The cash bonus can reach as much as $1,500 for a $500,000 deposit or transfer.

The E*Trade Adaptive Portfolio experience begins with a question about the goal of this account. There are four goal choices for the account holder (retirement, education, long-term growth and major purchases). I chose retirement. Next, you specify an initial investment. For the purposes of the demo, I went with the minimum, though E*Trade provides a link to an interactive calculator that can help you determine how much you need to invest to reach your retirement goal. Next, you provide the investment time horizon, followed by the anticipated withdrawal period. This is followed by a number of questions designed to gauge the user’s risk tolerance and loss tolerance.

Depending on the answers, E*Trade then suggests one of six portfolios to the user. Since my suggestions were relatively aggressive, the application suggested “Portfolio 5” from six choices. No. 5 included 80% equities, 19% fixed income and 1% cash. The equities were split across large-cap blend, small cap, international and emerging markets. Fixed income was split between core and opportunistic holdings.
In my case, E*Trade recommended a hybrid portfolio comprising both ETFs and mutual funds. I clicked a question mark to ask why, and saw the hybrid offering allows for active management for asset classes where active may add value, though it didn’t say which asset classes E*Trade thinks benefit from that. I changed my selection from the hybrid portfolio to the all-ETF portfolio to see what would happen. While my equity allocation remained the same, my bond allocation changed to all core, eliminating the opportunistic fixed-income allocation. This leads me to believe that opportunistic bonds are one asset class that E*Trade plans to access through mutual funds. The only way to know for sure would be to open the account with $10,000.

There are a number of other things a prospect can do at this point without actually committing to open an account. For example, one can toggle between the asset allocation view and a hypothetical return view. The latter shows hypothetical historic returns for the portfolio as well as hypothetical forward-looking projections. You can also view the other portfolios to see what they would look like. They range from Portfolio 1 (with zero equities, 99% fixed income and 1% cash) to Portfolio 6 (with 99% equities, 0% fixed income and 1% cash). All the portfolios had the 1% cash allocation. It’s noteworthy that Portfolio 2 offered two options: an aggressive income option, with high current income as the primary objective, and an inflation-protection option, with the preservation of real (inflation-adjusted) income as the primary objective.

After examining the results, users are presented with four options: They can retake the risk questionnaire, get more information, convert an existing E*Trade account to Adaptive Portfolio, or open a new account.

My limited user experience with the product was very good. E*Trade makes it very easy for users to get explanations for terms they may not be familiar with, and get additional information in most cases with a single mouse click. Throughout the process, virtually every screen has a “call us” link, a chat link and an FAQ link. The information in the FAQ was clear and sufficient. There are also screen share links throughout so that E*Trade representatives working with a client or prospect can view exactly what the client is viewing during a conversation.

There are a couple of other things worth noting. Adaptive Portfolio offers free rebalancing, but no tax-loss harvesting. The underlying investment costs for the ETF portfolios are approximately 20 basis points, according to my research, and the costs range from 20 to 45 basis points for the hybrid portfolios. Unlike some other offerings of this type, Adaptive Portfolio accepts transferred securities as well as cash. The only obvious extra fee is a $60 fee to transfer funds out of E*Trade.

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