Reference no: EM133006262

BARRON'S Robo-Advisors Want to Automate Your Retirement.Here's What They're Offering.

By Daisy Mackey August 22, 2020

Robo-advisors can automate routine decisions retirees face, such as taking required minimum distributions, and many now also offer advice on more complex financial issues from human advisors.

Robo-advisors have helped automate the investment process for many retirement savers. Now they want to help those same savers during retirement itself.

Driven by shifting demographics and tens of thousands of retirements each month, the automated investment platforms that have brought generalized financial guidance to the masses are now adding features geared to those nearing or in retirement.

Robo-advisors can automate routine decisions retirees face, such as taking required minimum distributions, and many now also offer advice on more complex financial issues from human advisors. When choosing a robo, there are many factors to consider, from how much customization goes into your investment plan and whether the robo will automatically rebalance and harvest losses.

One of the most crucial decisions facing investors as they near retirement is how to turn their savings into a steady stream of income for living expenses. Some robo-advisors, such as Betterment, Personal Capital, Schwab Intelligent Portfolios Premium and Vanguard Personal Advisor Services, permit customers to link to accounts at other institutions-such as individual retirement accounts or 401(k)s. That allows clients and their advisors to view their overall financial picture when weighing how much they can regularly withdraw. At Vanguard Personal Advisor Services, the robo can then automatically deposit the amount it recommends the client withdraw (or that the client chooses) from his account each period into his bank account, and also recommend how much he should withdraw from other accounts.

In January, Schwab launched Schwab Intelligent Income, a feature available within its robo platforms that uses algorithms to calculate and recommend a pretax withdrawal amount that it has determined has an 80% probability of being sustainable through the time frame the customer specifies.

The feature runs the client's portfolio through simulations of 1,000 different hypothetical future market environments and paths of investment returns. Clients can enable it to make automatic deposits to their accounts

• As they calculate a withdrawal plan, robos will factor in when a customer will claim Social Security payments, with some offering more customization than others in making that decision. Another confounding, yet consequential decision retirees face: calculating the required minimum distribution, or RMD, they're required to take from their traditional IRA or employeesponsored retirement plan once they reach age 72, recently raised from 70½.

Many robos automatically factor RMDs-including those required from external accounts-into a client's auto-withdrawal plan.

In the process of establishing a withdrawal plan, for example, Schwab Intelligent Income plans for required minimum distributions with proportional withdrawals from taxable brokerage accounts and IRAs, reserving withdrawals from Roth IRAs, which aren't taxable, until they're needed.

Robos do offer some proactive hand-holding. United Income, Vanguard and others reached out to customers earlier this year, for example, to advise them that the Cares Act allowed them to forgo taking RMDs this year In addition to their low-cost automated services, many robos now offer higher-priced services for those who may want to consult with a human advisor, which can be valuable to near-retirees and retirees. These premium offerings are generally still less expensive than those of a traditional financial advisor. Consider Vanguard's two offerings: Vanguard's Digital Advisor requires $3,000 in assets, charges an annual fee of 0.15% of assets managed, and offers no access to financial advisors. Its Personal Advisor Services, however, requires a minimum investment of $50,000 and charges an annual fee of 0.30% of assets managed, with reduced fees for those with more than $5 million in assets. Those with less than $500,000 in assets under management may consult with a pool of advisors, while those with more than $500,000 are assigned a dedicated advisor.

Among other complexities, Vanguard's advisors help clients navigate questions on Social Security optimization, goal planning and estate- and tax-planning, says Claire McCusker, a principal with Vanguard Personal Advisor Services. Charles Schwab offers a fully automated investing service with no advisory fee, but its Schwab Intelligent Portfolios Premium for those with at least $25,000 in assets charges a $300 upfront fee for planning and a $30 monthly fee after that for a digital financial plan and unlimited guidance from a certified financial planner.

Betterment offers a digital plan that includes no one-on-one access to certified financial planners unless clients purchase advice packages. Its premium plan for those with at least $100,000 in assets, however, includes unlimited access to a certified financial planner. "One-third of our business comes from folks who are 50 and over," says Corbin Blackwell, a financial planner at Betterment.

United Income offers tiered pricing based on an investor's assets under management; all tiers offer access to a dedicated advisor. The average annual advisory fee is 0.67% of assets, it says.

At Personal Capital, which was acquired by Empower Retirement in June, annual fees start at 0.89% of assets managed, and are reduced for those who have more than $1 million under management. Those who have more than $200,000 under management have access to a dedicated advisor.

QUESTION:

In the article Robo-Advisors Want to Automate Your Retirement. Here's What They're Offering, the author outlines the many benefits offered by robos to retirees.

Required:

Problem 1: List and describe 3 ways in which retirees are well-served by robos.