When it comes to your investments, you may have researched and proceeded with the investments on your own or hired a financial advisor to assist you. Now, however, you don’t need the help of any human – just a robo-advisor.
What Is a Robo-Advisor?
A robo-advisor is a service that automates the asset distribution of your investments using a computer algorithm. Most robo-advisors invest exclusively with exchange-traded funds, however some allow you to create a more diverse portfolio with individual stocks and bonds as well as ETFs. Some also let you choose your risk tolerance and adjust your allocation accordingly. Many investors are considering this wealth management service because of its many benefits – such as its price. While you may be paying a financial advisor a substantial amount of money to assist you with your investments, this service has minimal costs associated with it. It is ideal for younger investors, those with small amounts to invest and who are comfortable navigating the online world.
Even though robo-advisors are by nature hands-off, many companies still offer human interaction to assist with certain financial aspects that an algorithm cannot handle, such as estate or retirement planning. This makes robo-advisors limited in what they can and cannot help you with. Additionally, when working with a robo-advisor, you will not receive as extensive and detailed financial advice as you would when working directly with a financial advisor.
How Do I Choose the Best Robo-Advisor?
Robo-advisors vary significantly in their services, which makes it crucial to choose the right one for you. As you look for the best robo-advisor, there are several elements of this wealth management service that you need to consider. These include:
While robo-advisors cost significantly less than working directly with a financial advisor, there are still costs involved. Financial advisors can charge you 2 percent or more of your assets annually while robo-advisors charge as low as 0.12 percent. However, the annual fee most robo-advisors will charge you is between 0.35 and 0.7 percent of your assets. Furthermore, some companies will charge you even less if you have less money invested.
In addition to annual fees, also check for any signup fees or hidden fees the company may charge you. Many robo-advisors don't charge these additional fees, but some do – so look at the terms.
Most robo-advisors have account minimums you must meet to qualify for a specific level of service. Some of the best companies for beginner investors have very low minimum requirements or none at all. However, the more money you invest, the better the service you will receive. If you invest substantial amounts of money, many companies will provide you with a financial advisor to help you reach your financial goals.
You will find that most robo-advisors invest primarily in established exchange-traded funds. You can specify your risk tolerance and your funds are distributed accordingly to asset classes such as U.S. stocks, U.S. bonds, international stocks, international bonds and other alternatives. However, some services limited you to ETFs that are selected by the company. Additionally, each service will have a different method to create your portfolio. Some may ask you to fill out a questionnaire while for others you may work with an advisor. This process may also differ depending on how much money you choose to invest.
The type of accounts available will also vary by robo-advisor. However, most support accounts such as traditional and Roth IRAs, joint accounts, personal investment accounts and trusts.
While some robo-advisors have very low costs, they are also limited in additional services and features. You will find many robo-advisors offer direct indexing. This means you can own all the securities of a major index instead of owning a mutual fund. Automated tax-loss harvesting is another popular service offered by robo-advisors. Tax-loss harvesting is when you sell a security that has experienced loss and replace it with another one to offset taxes. Additionally, a handful of robo-advisors will trade fractional shares. However, be aware that many of these services are available with added costs and fees.
With most robo-advisors, the more money you invest, the more options, services and human interaction you will receive. The amount of human interaction provided will vary by company. Some firms provide general investment assistance via telephone, email or chat. Other companies will not provide any investment advice, just technical support, while a handful offer a substantial amount of direct interaction and assistance.
Top Robo-Advisors on the Market
There are several robo-advisors available. Here are several of the best.
If you are just starting out, WiseBanyan is an excellent option. This company does not charge any type of management, trading or rebalancing fees. Basic services are free, though you can pay for additional options if you wish.
While this company is relatively limited in its services, it can provide you with a financial plan within a matter of minutes and will continue to monitor your accounts to ensure everything is how it should be and you are making money. You have full control of your money and can monitor everything yourself, make deposits or withdrawals, and change your financial plan as you choose. Furthermore, WiseBanyan allows you to consolidate all your accounts, making money management much easier. This company also offers tax-loss harvesting services, but this does come with an additional fee.
When working with WiseBanyan, there is a minimum deposit of $1. When you deposit money, all money is kept in a brokerage account with Apex Clearing Corporation and protected by the Securities Investor Protection Corporation (SIPC).
Betterment is another strong option if you are a beginner investor. This company does not require any minimum investment amount and does not require you to maintain a minimum balance. It also offers three different fee plans, depending on your financial situation. This service’s lowest plan, the digital plan, costs you 0.25 percent of your assets each year and provides several services, including automated portfolio management, financial dashboards and investing features.
The plus plan costs you 0.40 percent per year and provides all the features and services available in the digital plan. You also receive a telephone consultation and account monitoring from financial advisors. And if you want even more human interaction and assistance, the premium plan costs you 0.50 percent per year, and you are allowed unlimited calls to financial advisors. However, you must carry a minimum balance of $250,000. Betterment also provides an ample amount of retirement and IRA assistance if needed.
You do not need a significant amount of money to invest with Wealthfront. This company requires a $500 minimum deposit to open an account. Additionally, there are no annual fees for your first $10,000. Once you have invested more than $10,000, the service will cost you 0.25 percent each year. There are also no hidden fees or trading commissions you must pay.
Wealthfront allows you to open a variety of popular account types, including tax-advantaged retirement accounts as well as joint and trust accounts. Tax-loss harvesting is available from this service, and there is no minimum deposit required for it. The company also offers a direct indexing service, but it is only available to customers with at least $100,000 invested.
Acorns is another contender for the best robo-advisor for beginners. This company does not require any minimum deposit, and there isn't an annual fee until your account goes above $5,000. At that point you pay 0.25 percent annually. However, if you are a student and have a valid .edu email address, you will receive the first four years with the service free. In addition, this company works with all types of taxable accounts, including IRAs. However, it does not offer tax-loss harvesting like other robo-advisors.
Acorns provides automatic rebalancing, which helps keep your portfolio in balance as some investments grow faster than others. Additionally, you don’t have to worry about any transaction fees, so you can make withdrawals or deposits for free.
Charles Schwab was one of the first companies to launch a robo-advisor and is one of the best in the market. This company is also one to highly consider if keeping your costs low is a priority. This company doesn’t charge any type of service fees or commissions. With this robo-advisor, you pay the operating expenses of your portfolio. The average operating cost for a conservative portfolio is a low 0.08 percent, a moderate portfolio is 0.19 percent and an aggressive portfolio is an average of 0.24 percent annually.
This firm does require a sizable initial deposit compared to the other services we've listed. The account minimum is $5,000. Charles Schwab also supports a large selection of accounts, including traditional and Roth IRAs, non-retirement accounts and trusts. Rebalancing services are available at no additional costs, as well as tax-loss harvesting, which is another benefit to this service. However, tax-loss harvesting is only available for portfolios containing $50,000 or more.
Personal Capital offers more human interaction than many similar companies. However, it also has a much higher minimum balance and higher costs than most robo-advisors. You'll have to deposit at least $25,000. With this company, you don’t pay numerous fees. Instead, you pay 0.89 percent for your first $1 million dollars, and that percentage decreases for accounts over $1 million.
This company has a strong focus on personalized financial advising. This means that you do work with a human advisor to create a financial goal and strategy. These advisors are also available to answer any questions or concerns you may have, which is not something you will find with more limited robo-advisors.
In addition, Personal Capital offers more than just managing your investments and wealth; this company can assist in various aspects of your financial life, including retirement and estate planning, insurance coverage, refinancing and debt management. Furthermore, there is a large resource center on the company website which provides ample resources and information regarding various aspects of finances.