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.

Fidelity
Fidelity GO has a $5,000 minimum. Unlike E*Trade, Fidelity currently accepts cash only to fund GO accounts. GO creates portfolios that can include both ETFs and mutual funds. The portfolios are built and monitored by Geode Capital Management, an institutional investment advisor. The advisors also rebalance portfolios as needed. This adds a human element to the process that may appeal to some. No tax-loss harvesting is currently offered.

The program advisory fee is 35 basis points annually, billed quarterly in arrears. The advisory fee may be reduced with a “variable fee credit.” According to the GO website: “The variable fee credit reduces your gross advisory fee by the amount of any investment management or other fees that we or our affiliates receive as a result of investments held in your account, and can help reduce the gross advisory fees of the service.
For Fidelity funds, the credit amount will equal the underlying investment management and any other fees or compensation paid to us or paid to our affiliates from the Fidelity fund. For non-Fidelity funds, the credit amount will equal the distribution or shareholder servicing fees and any other fees or compensation paid to us or our affiliates by the non-Fidelity funds as a result of your investments in those funds. The variable fee credit is intended to address any potential conflicts of interest that might arise from those fees.”

So, to the extent a portfolio is made up of Fidelity investment products, there is no fee other than the 35 basis points.

The Fidelity GO process begins by asking the year you were born. Next, it asks if the account will be for you only or if it’s a joint account. Next, it asks if the account is for retirement or for something else. I chose retirement. Next, it asks if the account is taxable or tax advantaged. I then specified the initial investment and the monthly additions. GO asked about my household’s gross annual income to estimate my potential tax situation. It then asked me to rank my risk tolerance on a scale of 1 to 10. After it does calculations, it places you into one of seven portfolios. I was placed into the sixth.

The portfolio had 70% equity, 25% bonds and 5% short-term fixed/cash. There was no dedicated emerging market equity exposure, although one of the holdings included some emerging market equities.

As with E*Trade, you can view all of the other portfolios. Unlike E*Trade, Fidelity actually displays the proposed mutual fund and ETF investments. After the variable fee credit, the fee for the portfolios, not including the underlying investment fee, ranged from 4 basis points to 23 basis points, with the lowest-risk, least equity-heavy portfolios having the lowest fees. It was also worth noting that the most conservative portfolio had a 20% allocation to equities, while the most aggressive included an 85% equity allocation. Clearly, the Fidelity approach to portfolio construction differs significantly from that of E*Trade.

While I judged the overall experience of both platforms to be very good, there were a few things about the Fidelity process that I preferred. First, it asks early on whether this is a taxable account so it can tailor the investment options accordingly. Second, by asking about monthly contributions, it raises the issue early and encourages monthly savings. Third, I felt more comfortable with the Fidelity approach to portfolio construction, although obviously that is a matter of personal preference.

There were also a few things I particularly liked about the E*Trade platform. These included the multiple risk questions (Fidelity had one), and the screen sharing. Although the overall cost of Fidelity GO is estimated to be less than that of E*Trade’s offering, the operation of the variable credit can be difficult to understand.

Lessons For Advisors
Examining some retail digital investment platforms should yield a number of lessons for advisors. Perhaps the first one is that these platforms are likely here to stay, and the advisory community needs to respond in order to stay competitive.

There are a number of ways to differentiate your digital offering should you choose to launch one. Clearly, the asset allocation across model portfolios and the underlying investments can be a differentiator if you have expertise in those areas. A human component incorporated in the investment process can be a differentiator as well. Tax management is another area where advisors can differentiate.

The client on-boarding process, including the initial questionnaire, is an area where advisors can further set themselves apart. You can also add unique elements—for instance, third-party software like Riskalyze or FinaMetrica—or add some proprietary process.

The user experience will need to be good, and both Adaptive Portfolio and GO are excellent examples. They are easy to navigate, provide extensive FAQs and offer other tools to make even the investment novice comfortable with the process.

Some advisors will come to the conclusion that these retail offerings are not a threat to their business, figuring that they offer more than just portfolio construction and asset allocation. I am in total agreement with that sentiment, yet there is still room to streamline your investment process, lower costs and automate so you can spend more time adding value. Before you deploy your own digital advice platform, perhaps it makes sense to understand what you are competing against.