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October 03, 2023 at 07:52 PM
What You Need to Know
- Morningstar gathered suggested robo portfolios for two different client profiles.
- Recommendations for each investor varied sharply.
- Robo-advisors also differed in questions they asked potential clients.
Investors shouldn’t assume that all robo-advisors will produce similar portfolio recommendations, according to a recent analysis from Morningstar. The data suggest that individuals interested in choosing a digital advice platform should first do some research to understand a service’s offerings.
Robo-advisors’ recommended portfolios can vary significantly, Morningstar Research Services portfolio manager Amy Arnott noted in a recent column.
As a follow-up to the research firm’s annual robo-advisor survey, Arnott asked an intern to dig into data to learn which asset allocations various digital advice services would suggest to two hypothetical investors — one aiming to make a down payment on a house in seven years and another investing funds for retirement in 25 years.
Morningstar assumed that hypothetical investor A was 30 years old, earning $80,000 and seeking to save $50,000 for a down payment. This investor would have a $10,000 emergency fund, $50,000 in retirement savings and $10,000 in a taxable account earmarked for the robo-advisor portfolio, with plans to contribute $250 a month.
For investor B, the research team assumed the client was 40 years old, earning $100,000 and building toward a $1 million retirement nest egg. This imaginary investor had a $10,000 emergency fund and $100,000 in an IRA to be used in the robo portfolio, with plans to contribute $500 every month.
Morningstar also assumed that both investors had moderate risk tolerance.
“The results were eye-opening,” Arnott wrote.
Among the findings:
Many Robo-Advisors Require Registration for Access to Questionnaires
While Morningstar included 20 robo-advisors in its study, most required investors to establish an account or register by email to answer risk-tolerance questions, she wrote. Only seven firms allowed investors to go through the process without signing up, she said.
“This lack of transparency is unfortunately pretty common in the digital advice industry,” Arnott wrote. “Investors often can’t access basic information about how their money will be invested until they actually sign up with a provider. That makes it impossible to determine ahead of time whether the portfolio would be a good fit.”
The seven platforms that allowed investors to answer questions without registering were Ally Invest, E-Trade Core Portfolios, Fidelity Go, J.P. Morgan Automated Investing, Merrill Edge Guided Investing, Schwab Intelligent Portfolios and SigFig, Morningstar reported.
