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Vanguard, Betterment Top New Ranking of Robo-Advisers

Morningstar waded through the crowded field and looked at cost, transparency, asset allocation and financial planning tools.

(Bloomberg) -- For investors who want to put their money on autopilot, there is no shortage of robo-advisers to choose from. But which one’s the best? The popular investment platforms can vastly differ in quality and value, according to a new ranking.

A Morningstar Inc. analysis of 16 robo-advisers says the products offered by Vanguard Group and Betterment are the best overall options to help investors achieve their financial goals. The two rose to the top of the list thanks to their “low cost, transparency, reasonable asset allocation approach and broad range of financial planning tools,” the report said.

So-called robo-advisers shot up in popularity over the past decade, starting with the simple premise that algorithms could take an investor's age, time horizon, goals and risk tolerance and create a low-cost portfolio of exchange-traded funds for them. More recently, the companies have started offering more complex or personalized products, including access to crypto and ESG portfolios, as competition grows with brokers such as Robinhood Markets Inc. and Webull. 

Robo-advisers were estimated to have $785 billion in assets as of year-end 2020, according to Backend Benchmarking, which also does an annual ranking of the firms.

“It’s difficult to measure how much money these programs make for clients,” said Morningstar's Amy Arnott, a portfolio strategist who was lead author on the report. “That said, the general approach most robo-advisors take — focusing on a broadly diversified portfolio of low-cost ETFs, matching the portfolio’s risk profile with the investor’s risk tolerance and time horizon, encouraging long-term investing instead of market timing, etc. — has a lot in its favor.”

She added that investors who use a robo-adviser that follows these practices should see better long-term results than they would buying and selling individual stocks.

While traditional advisers may charge fees closer to 1%, the companies analyzed by Morningstar levied fees from zero to 1%, with the median being 0.30%.

Vanguard’s offerings beat Betterment by a nose in Morningstar’s inaugural report. Robos that didn’t come off as well: Titan Invest, E*-Trade Core Portfolios, Merrill Edge Guided Investing, Morgan Stanley Access Investing, UBS Advice Advantage, and Wells Fargo Intuitive Investor. Morningstar’s analysts dinged the group for “higher fees, limited planning features, and in some cases, a lack of transparency.”

The report rated offerings on a five-point scale that looked at fees (a 30% weight), the process for investment selection, portfolio construction and how investors are matched with portfolios (30%), the robo’s parent company (20%) and the spectrum of services (20%).

As robos have become more popular, regulators have examined their operations and marketing claims more closely. One example of that came in June, when Charles Schwab Corp. said it would set aside $200 million related to an ongoing probe by the Securities & Exchange Commission involving its Schwab Intelligent Portfolios robo-adviser. The probe “largely concerns historic disclosures,” according to an 8-K filed by the company at the time. 

Schwab Intelligent Portfolios earned an above-average grade from Morningstar, although the report cited concerns about its practice of allocating “a significant portion of client assets to low-yielding, in-house cash accounts.”

To contact the author of this story:
Suzanne Woolley in New York at [email protected]

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