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E-Trade enters robo market with hybrid offering

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(Bloomberg) -- E-Trade has joined the digital advice space, launching a hybrid robo advice platform.

E-Trade’s Adaptive Portfolio follows in the footsteps of Charles Schwab, which built its robo advice platform last year, and of startups including Betterment and Wealthfront.

Previous robos have embraced passive investing, using index funds that ETFs rather than pricier actively managed funds. They use a consistent set of formulas to determine how to spread money across different asset classes. At E-Trade, a nine-member investment team will tweak portfolios in response to market conditions.

Customers will have two investment options: an ETF-only portfolio and one that includes actively managed mutual funds, along with index funds. Rich Messina, E-Trade’s senior vice president of investment product management, and the investment committee will vet the fund managers, deciding when and how much to invest with them.

The service will charge customers 0.3% of their assets a year, with an account minimum of $10,000, compared to Schwab’s Intelligent Portfolios, which is free, and Betterment's, which charges 0.15% to 0.35%, based on account size. Wealthfront charges 0.25% per year on assets after the first $10,000.

In addition to any management fees for the portfolio, customers of all four robo advisers must pay expenses for the funds in which they're invested. The very cheapest ETFs can cost just 0.03% per year vs. more than 1% for most actively managed equity funds.

E-Trade aims to hold costs down by keeping 20% to 50% of the portfolios in cheaper index funds and using cheaper institutional shares of mutual funds. Customers who choose the hybrid active/passive strategy end up paying fund expense ratios of 0.2% to 0.45% a year.

How does Messina decide which fund managers to choose and when to use them? Experience helps, he said. Each member of the investment committee has at least 15 year years in the industry. “Some of it is your gut," he added.

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