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Robo-Advisor Offers Your Clients a Free Second Opinion

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Another barrier separating human advisors and the robotic rivals on their tail was breached with the announcement Wednesday that automated investment manager SigFig is offering free portfolio analysis and recommendations.

The vaunted second opinion has long been a staple of advisor competition, but having a robo advisor perform the analysis, flag potential problems and suggest alternatives may alleviate feelings of obligation that would keep reluctant consumers from trying out the service.

What’s more, investors attracted to cheaper robo offerings normally have to take the steps of transferring their funds and creating a new account.

SigFig, in a release announcing the new service, says its free service signifies a focus on helping investors optimize existing accounts, both in the taxable and retirement domains.

And if SigFig’s 3-minute analysis uncovers the huge portfolio inefficiencies it believes it will find, investors are free to sign up for the firm’s low-cost wealth management services.

The San Francisco-based registered investment advisor, which got its start as data publisher WikiInvest, figures that between its algorithmic data engine, its de minimus asset management fees and the low-cost ETFs it would propose using, it’s going to uncover savings opportunities of significance.

Indeed, the data-driven company — whose technology is used on the financial portals offered by AOL, Forbes and USA Today — has released a survey timed to coincide with its free-analysis offering, showing that 90% of investors make easily correctible mistakes.

And the costs of those mistakes are steep: Last year, when the S&P 500 returned 13.6% and a more conservative, balanced portfolio generated a 10.6% return, the median investor earned just 4.2%, and fully a third of the investors in SigFig’s survey ended the year with zero or negative returns.

The robo firm’s research, based on $350 billion in tracked assets, finds that 60% of investors pay too much in fees; 27% endure costly cash drag; and 60% are overconcentrated in a single stock.

Assuming 20 years of compounding with a 5% average rate of return, fund fees averaging 0.8% and advisory fees of 1.25%, the robo-advisor says a human advisor who uncovered the same problems would take 12 more years than SigFig to achieve the same level of savings.

That’s because SigFig charges no commission and uses cheap ETFs in its portfolios, charging just 25 basis points on investor accounts and twice that for retiree accounts aimed at achieving a 4% rate of retirement income. The firm says it is the only robo-advisor with a retiree-focused income product.

The tireless robo-engine will sync all of an investor’s brokerage and advisor accounts, combing portfolios for excessive risks or fees.

The robo-advisor’s research elaborated on some of the most common investor errors cited above, including underdiversified portfolios.

Specifically, 60% of investors (in a sample size of at least 250,000 investors) had more than 10% of their portfolios in a single stock; half of investors had more than 80% of their portfolios in equities; and 60% exhibited an extreme home bias, with less than 10% of equities in international stocks.

On the fee side, 60% of investors analyzed owned at least one high-cost fund, which SigFig defined as a fund with an expense ratio of 50 or more basis points — a fairly low threshold in the asset management industry, but perhaps a clue as to the slice of low-cost ETFs it recommends for its investors.

Closer to home for advisors, SigFig found average advisor fees to total 1.3% of assets under management, averaging $7,000 annually for the $250,000-plus investor population in its analysis.

The research uncovered costly inefficiencies in three other areas: cash drag, with 27% of portfolios laden with 10% or more of idle cash; inattention, with 25% of portfolios monitored not having been rebalanced within the past year; and overtrading, with 20% of investors achieving a high 100% portfolio turnover.

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