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E-Trade plays its cards in evolving automated investment space

TechCrunch TechCrunch 8/06/2016 John Mannes

E-Trade recently rolled out its new Adaptive Portfolio aimed at young professionals just beginning to face the financial struggles of adulthood.

Adaptive Portfolio combines previously offered active and passive management with risk classifications that automatically rebalance to accommodate market changes. Users will also have the option to connect with financial consultants.

Competing players, Wealthfront and Betterment, exclusively offer passive portfolio management because it is less costly. In the past, E-Trade has combined this widely adopted form of investment management with optional active portfolio management.

Passive management aims to match market returns by aggregating exchange traded funds (ETF) to simultaneously maximize diversification and reduce costs. ETFs come in many shapes and sizes but typically follow industry verticals or specific asset classes. These investment vehicles are great because they are relatively inexpensive and provide investors with exposure to many corners of the market without assembling thousands of stocks individually.

E-Trade and its competitors use the concept of risk tolerance to assign weights to ETFs within user portfolios. Freshly employed users without a mortgage or family can opt for a more risky portfolio consisting of more volatile ETFs. Similarly, users with a lot to lose can opt for a safer track with more stable ETFs.

Active management, on the other hand, involves making calculated investments with the goal of beating the market. Active strategies are more effective when trading narrow asset classes. E-Trade has offered active and passive management of assets since early 2015.

However, in its latest offering, the optional active management will map on top of personalized risk tolerance models and give investors automated exposure to both mutual funds and ETFs from well-recognized financial services firms like State Street and Vanguard.

With Adaptive Portfolio, every client will be assigned one of 12 possible portfolios that match up with six investment profiles. Drift rebalancing will be automated for each investor to account for changes in asset volatility. Each model portfolio will be reviewed by a dedicated investment committee.

The new hybrid investment service will require an initial investment of $10,000. The minimum balance is largely in place to ensure enough capital exists for thorough diversification. In addition to the minimum balance, users will pay an annual net advisory fee of 0.3 percent with no separate trading commissions. In return, investors will have access to financial consultants.

Unfortunately, the rise of automated trading has done little to automate the process of sifting through fine print.

In addition to explicit fees, E-Trade will also require 1 percent of all portfolios to be held in cash. This cash is handy for portfolio rebalancing. In the event of a rebalance, users might not initially need to sell existing holdings but can use the cash.

E-Trade plans to invest cash balances in the JPMorgan Liquid Assets Fund. Clients can receive 0.01 percent interest on cash if they have less than $500,000 invested in the platform. Recently, Charles Schwab launched an automated passive portfolio management platform with a similar, but larger-scale, cash-holding requirement.

The company is offering a cash incentive program for new accounts. Accounts with a starting balance of less than $25,000 will pay out a $100 bonus. Accounts with over $500,000 in starting capital will pay out $1,500.

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