Q: What is your opinion about using automated investment vehicles, such as, Wealthfront or Betterment, as a place to put 401(k) dollars after a person has retired?
Dave, Willmar, Minn.
A: I think Wealthfront, Betterment and similar automated wealth management firms — better known as robo-advisers — are well worth considering. Initially, they seemed geared toward young adults, but now they are focusing more on boomers and improving their product offerings.
Low-cost robo-advisers are best suited for long-term savers and retirees with modest portfolios, relatively simple finances and active lives.
Once dismissed as a niche product, robo-advisers will transform large segments of the wealth management business — for the better.
The process for joining a robo-adviser is familiar and efficient for anyone comfortable online. The recommended strategy will reflect the basic framework of modern portfolio theory. You'll end up with a risk-adjusted, well-diversified portfolio comprised of a number of low-cost indexed investments. Retirees can easily set up withdrawals.
Fees are low. In general, the basic annual fee is around 0.25 percent of assets. Tack on another 0.15 percent to 0.30 percent for the indexed investments. The option of talking to a human adviser pushes the total levy closer to 1 percent. The program will automatically rebalance your portfolio and harvest your tax losses.
The robo-advising business is larger than the handful of firms that get the most attention. For example, Charles Schwab and Vanguard have entered the business. The competition is heating up, good news for savers, although it means more research to hit on the firm with the products and fees that fit your needs. (Simple Dollar, Nerd Wallet and Morningstar, to name a few websites, have done detailed comparisons of some robo-advisers.)
Looking ahead, the money management industry will evolve toward a lower-cost hybrid model offering customers a combination of cheap automated investment services and as-needed human insight to handle the hard questions retirees confront.
The hybrid model should work out well for most savers except truly high net worth households that need sophisticated wealth structuring strategies. For the rest of us, the digital disruption of the money management business is a boon.
Chris Farrell is senior economics contributor, Marketplace, and commentator, Minnesota Public Radio.