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Waddell & Reed Advisors vs. Robo-Advisors: Which is Right for You?

Author: Michael Davis

Robo-advisors offer automated, algorithmic-based investment management services. There are a variety of robo-advisors or digital advisors springing up regularly as of late. This broad class of investment manager has many in-category differences with some platforms such as Betterment and Wealthfront, holding your assets and managing them with no human interaction. Personal Capital, another player in the sphere, combines both automated and integrated human advisor services.

Waddell & Reed Financial Advisors is not a robo-advisor. Founded in 1937, this asset management and financial planning firm serves individual, corporate, and institutional clients personally. The company includes a national network of 1,800 financial advisors working in 400 offices. The advisors build personalized financial plans for their clients using various investment and insurance products, including their own stable of propriety Waddell & Reed mutual funds. (For more, see: Robo-Advisors and a Human Touch: Better Together?)

Differences and Similarities

Investment management style is client driven and personalized in the Waddell & Reed model. This company is a traditional financial planning firm, doling out individual advice and financial plans one by one to their individual clients. Their mutual fund offerings include branded Waddell & Reed, Ivy, and InvestEd funds with a variety of share classes and fee structures.

In contrast, robo-advisors either control your assets and invest in a variety of low cost index and exchange-traded funds (ETFs) or allow you to control of your assets. In this case, you link your portfolio with the robo-advisor's platform and the company makes investment recommendations for you to carry out. Some automated robo-advisor platforms also recommend individual stocks. (For more, see: A Guide to Choosing the Best Robo-Advisor.)

Costs are one big difference between Waddell and Reed and the typical automated robo-advisor platform. According to Morningstar, Inc. (MORN), Waddell & Reed's average expense ratios are high. Notice that the company's municipal bond funds average 1.34% on the low end and 1.83% for international stock funds on the high end.

Consider Wealthfront and Betterment, two of the low fee robo-advisors that invest your money in low fee ETFs. These advisors' fees range from 0.15%-0.25%. Tack on the average exchange-traded fund expense ratio of 0.15% and you've got the annual percent of a robo-managed portfolio of 0.30% to 0.40% in contrast with Waddell & Reed's expense ratios of at least 4 times that amount. Other robo-advisors have higher fees with a higher touch, or human contact. (For more, see: Betterment vs. Wealthfront: A Fee & Fund Comparison.)

When comparing Waddell & Reed's returns against their category averages, the results are equivocal. In some years Waddell & Reed beats the category averages, such as in 2011, 2012 and 2013. More recently, the traditional firm underperformed the averages.

Are the results worth the higher traditional broker fees? Consider that the advisor managed portfolio must earn returns greater than the 1.34% to 1.83% management fee before the investor nets anything. With a robo-advisor, your portfolio has a lower fee bar to surpass before you begin compounding your returns. (For more, see: Robo-Advisors Face First Market Downturn Test.)

The Bottom Line

The Waddell & Reed model is the traditional approach where human financial advisors work with clients. It includes proprietary branded funds in addition to other funds, which may or may not be the best alternative for every client. In general, the robo-advisor platforms may have less human interaction. Their results are driven by complicated computer algorithms designed to maximize returns with minimal risk. Each individual must do their own due diligence and compare costs, services, and results to find their own preferred financial guide. (For more, see: Is an Online Financial Advisor Right for You?)

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