Comparing Robo-Advisors: IncomeClub vs. Betterment

The robo-advisor market has become pretty crowded in recent years.

After the successful rollout of options like Betterment and Wealthfront, major financial institutions have attempted to cash in, with the likes of Schwab and BlackRock joining the throng.

In a way, it’s just more of the same.

The good news is that IncomeClub is different, providing significant advantages to those homogenized offerings.


Dedicated versus Modern Portfolio Theory

In almost all instances, today’s robo-advisors take a similar approach, consisting of tracking major indexes and tax harvesting.

At IncomeClub, we provide cost-effective bond investing through the Internet. We focus on individual bonds, not the same old, tired methods used by others. We ensure that investors seeking conservative strategies are able to build their wealth without costly fees and high transaction costs.

Both Betterment and Wealthfront focus on using modern portfolio theory. This states that both stocks and bonds correlate inversely and that because of this, cash, stocks, and bonds should be allocated proportionally, although there is no clear reason for this.

Commonly used metrics here include the investor’s age, as well as their tolerance of risk. Others include their “gut feeling’. Yes, asset allocation can reduce volatility within a portfolio, but it is only of so much use – the benefits evaporate once inverse correlation persists.

At IncomeClub, we take the approach of asset dedication, rather than allocation. We follow dedicated portfolio theory, which is based on the concept that dedicated asset allocation ensures you can achieve your investment goals within your specific time horizon.

The entire goal here is to create predictable cash flows.

Understanding a Target Date Investment Portfolios

Bond investing offers many significant benefits, but perhaps the single most crucial one for investors saving with a defined time horizon, interested in cashing out later is maturity.

Individual bonds are paid back to the investor at the date of maturity. That is in contrast to bond funds, which are constant with most robo-advisors. Whether the bond price rises or falls while the bond is held, investors will receive a payoff at maturity, unless the bond issuer folds completely.

Ensuring access to funds at a defined point in the future is critical for any number of reasons.

For instance, saving for a child’s college education, or to purchase a home or vacation home are just a few common examples. Other individuals benefit from saving for retirement, with a guarantee that they can plan for exactly what they will receive at the maturity date.

Robo-advisors using the modern portfolio theory cannot guarantee such a return.

Reducing Risk in Investing

Our platform offers investors the opportunity to utilize conservative strategies, and to reduce their expenses in terms of transaction costs and fees. Of course, prudent investments carry lower risk levels, and more investors than ever before are willing to invest conservatively due to risk aversion.

This is a crucial consideration for many, including Baby Boomers living on a fixed income, Millennials planning to buy a home, and many others.

It’s tough to find financial products that offer a decent return with limited risk, particularly given the low-interest environment in the US currently. CDs pay virtually nothing, and savings accounts are almost pointless today.

However, the limited liquidity and vast range of bonds on the market can be intimidating, causing investors to opt for bond funds instead.

Again, the problem here is that bond funds cannot guarantee a return on the investment because they do not have a maturity date. It’s also likely that bond funds’ prices will fluctuate wildly as interest rates rise and fall.

Investing in stocks can be seen as a viable alternative, and it carries the image of success.

However, stock market downturns cause a massive capital loss for investors. And, when an investor’s portfolio is reduced by 30% to 50%, no power in the world can keep them from selling in an attempt to right the situation.

In Conclusion

There are quite a lot advantages to investing with a robo-advisor rather than going through a traditional broker.

However, not all robo-advisor platforms are created equal. Each investor must know his or her own risk tolerance, as well as the goals they need to reach in their investing efforts.

For those with specific income needs, IncomeClub is the ideal solution.

However, for those with more risk tolerance, or those who do not require a defined date of return, Wealthfront or Betterment might be viable choices.
Open Investment Account