What do you tell your financial adviser when you are leaving for an algorithm?
Joe O'Connor, a 52-year-old Connecticut salesman, had to have this conversation recently. It was delicate business explaining why he was ditching the planner he had been with for more than a decade, to put his money in the hands of what is known as a robo-adviser — a Web-based service that automates the allocation of your investment portfolio.
"It wasn't fun," O'Connor said.
That kind of awkward conversation is taking place more frequently these days, thanks to the rise of robo-advisers, which have about $20.1 billion in worldwide assets under management for new entrants, according to Switzerland-based research firm MyPrivateBanking.
While just a sliver of the $33.5 trillion in total U.S. investable assets, projections are for heady growth with new robo-advisers expected to grow to $42.6 billion in 2016 and $86.7 billion in 2017.
Why leave?
Looking strictly at fees, robo-advisers offer certain advantages. Prominent site Betterment (betterment.com), for instance, charges 0.25 percent on accounts between $10,000 and $100,000, and 0.15 percent above that. Competitor Wealthfront (wealthfront.com) has a similar cost structure, charging 0.25 percent for accounts worth $10,000 or more.
Personal Capital (personalcapital.com), which Joe O'Connor uses, offers more of a blended service, combining its automated recommendations with humans (albeit primarily via video chat or e-mail), charging .89 percent on portfolios up to $1 million.
That is in comparison to traditional financial planners, who charge around 1 percent or more of assets annually. (Fee-only planners have their own payment structure, billing per planning session instead of charging a percentage of assets.)
The low-fee logic of robo-advisers may work admirably for young savers starting out. In fact, many users are converted Do-It-Yourselfers or millennials with little investable cash, rather than midcareer professionals who have switched from existing planners, industry analyst Michael Kitces points out.