Fidelity Launches Automated Investment Advice Service

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Fidelity Investments launched its robo-advisory service on Wednesday.
ENLARGE

Fidelity Investments launched its robo-advisory service on Wednesday.


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James Leynse/Corbis

Fidelity Investments launched its “Fidelity Go” robo-advisory service nationwide Wednesday, making the fund giant the latest entrant to the fast-growing world of automated investment advice.

In starting its own robo service, Fidelity is entering a market that was pioneered by startups including Betterment LLC and Wealthfront Inc. as a response to investors’ demand for low-cost advice in an era of low expected returns. Regulatory changes, including the Labor Department’s recently released fiduciary rule, also implicitly favor low-cost advisory services willing to act in the best interests of their clients.

The field has come to be dominated by traditional financial-services companies. The two biggest players are Vanguard Group Inc., which had $41 billion in assets in its Personal Advisor Services as of June 30, and Charles Schwab Corp.
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%

, which as of June 30 had a combined $8.2 billion in its Intelligent Portfolios service and a related service for financial advisers.

UBS Group AG and LPL Financial Holdings Inc.,
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1.53
%

among others, have announced plans in recent months to offer automated investment services, most of which will pair computer algorithms with assistance from human advisers.

Fidelity announced the Fidelity Go service in November and has been testing it on a group of about 1,000 employees and customers. The service currently has about $14 million in assets, but both Fidelity executives and industry analysts expect it to grow rapidly.

“They were beat to the punch by Vanguard and Schwab, but I do think they will be successful,” said Tom O’Shea, associate director at Cerulli Associates, a research firm that specializes in the asset-management industry. The product’s “compelling” price, combined with Fidelity’s brand name, should help the company expand the market for robo advice, he said.

Fidelity Go charges annual fees of 0.35% in tax-deferred accounts and 0.40% in taxable accounts—a price that makes it competitive with offerings from Vanguard and other rivals. Those fees cover both the firm’s advisory service and the cost of the investment options, which include Fidelity’s Index mutual funds and exchange-traded funds from BlackRock Inc.
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0.14
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The minimum Fidelity Go investment is $5,000, substantially below the $50,000 account minimum on Vanguard’s Personal Advisor Services, which charges an advisory fee of 0.30%, plus underlying fund fees that average 0.14%, for an all-in cost of about 0.44%. Charles Schwab levies no advisory fees for its Intelligent Portfolios.

But the company keeps a portion of the assets—typically from 6% to 10% or more—in Charles Schwab Bank deposit accounts and makes money on the difference between the interest paid to investors and what it earns on those dollars. The company also earns revenue on Schwab ETFs when used in the portfolios, which have expense ratios that range from 0.04% to 0.48%.

For Fidelity, Mr. O’Shea said, “the big question is whether the product’s success will come at the expense of” pricier products and services such as the Fidelity Portfolio Advisory Service, a managed-account service that charges an annual advisory fee of between 0.60% and 1.7%.

Rich Compson, head of Fidelity’s retail managed accounts business, says the company expects Fidelity Go to attract younger clients—ages 25 to 45—who will ultimately “consider other [Fidelity] services” as their savings increase and their financial lives become more complex.

“They can grow with us as their needs change,” he said.

As with other robo-advisory services, Fidelity Go starts with a brief questionnaire. An investor’s answers determine which of 14 model portfolios—seven in the tax-deferred accounts and seven in the taxable accounts—the service recommends. (The service offers a longer questionnaire to those who prefer to provide additional information.)

A client can make changes to his or her asset allocation, although the company says it will take steps to discourage frequent trading. “If a person is constantly shifting allocations away from their stated goal, we would ask them to realign to their goal, or suggest that they move to a more appropriate product,” Mr. Compson said.

While primarily an online product, Fidelity Go offers investors assistance via a live-chat feature and a toll-free phone number. The service works on mobile devices, including tablets and watches.

As with other robo services, Fidelity Go offers rebalancing of investments to adhere to an investor’s desired asset allocation. But in Fidelity’s case, this service is performed by human portfolio managers rather than an algorithm.

The managers “will look at an account on a day-to-day basis to make sure it really needs to be traded,” Mr. Compson said. “During periods of market volatility, accounts can be whipsawed if they are too algorithmic in their trading.”

Initially, the service won’t offer tax-loss harvesting, a strategy of selling investments that have gone down in price to book losses than may offset taxable gains on other holdings.

When Fidelity uses its own funds, it will reduce its portfolio-advisory fee to offset the fees it earns on the mutual funds. If, for example, a Fidelity Index fund’s expense ratio were 0.10%, the company would reduce its advisory fee to 0.25% to hold to the total cost to 0.35%, Mr. Compson said.

Mr. Compson says details about the service Fidelity is developing for financial advisers will be available by year-end.

Write to Anne Tergesen at anne.tergesen@wsj.com