Robo advisors are becoming hugely popular with investors of all wealth and experience levels. It’s estimated that robo advisors will have $2 trillion under management by 2020, up from just $60 billion five years ago.
People are drawn to robo advisors because they offer professionally pre-built portfolios, automatic portfolio rebalancing, and tax-loss harvesting for an extremely low price compared to other managed investment options. Investors select the portfolio that most closely matches their investment objectives, arranges automatic deposits, and the advisor takes it from there. It’s a low-maintenance way to invest and grow your savings.
However, as the robo advisor industry has grown, some have added new features and services to attract more advanced and high-net worth investors. Customization is one such popular feature, but “customize” has different meanings depending on the robo advisor platform you choose.
Betterment, for example, recently launched the flexible portfolio option, which allows you to adjust the weighting of the individual asset classes within the pre-built portfolios. Although it was designed as a service for advisors who want to bring clients into the Betterment platform, the company is making it available to retail investors with at least $100,000 in their account. Betterment also built in guardrails to alert investors who make asset allocations resulting in high levels of risk or poor diversification.
Another company, M1 Finance, offers both pre-built portfolios known as Expert Pies and entirely custom portfolios. Once you select your portfolio investments, the platform manages all your trades and automatically rebalances your portfolio based on your settings.
Although the customization option is appealing to some investors, it also has drawbacks, especially for novice investors. Robo advisors use the same technology used by high-end fund managers to select and allocate assets within each of the portfolios. The portfolios are carefully built to help you achieve your financial goals at the lowest cost, and the robo advisor design discourages the type of emotional and undisciplined trading that sabotages account balances.
When you remove those built-in safeguards by allowing customization, you run the risk of much lower returns and higher fees, depending on how your robo account is structured. If you are a more sophisticated investor and want more control over your portfolio, you may do better with a hybrid-style advisor or a DIY portfolio.