Robo-Advisor Strategy

How to Choose a Robo-Advisor – Ask These 7 Questions First

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You know the drill-invest for the future or you’ll be destined to rely on a paltry Social Security payment in your old age. So, you kick some money into your employer’s 401(k) plan, but you want to invest additional money for your future. If investing seems a bit complicated, then find out how to choose a robo-advisor to help manage your money and grow your wealth.

How to choose a robo-advisor. 7 easy questions to ask.

Learn about this handy investing platform and how to choose a robo-advisor in a few easy steps.

What is a Robo-Advisor, and Why Should I Use One?

The basic robo-advisor model is similar, yet each individual company, put’s their own stamp on the tool.

Most robo-advisors ask you a few simple question about your goals and fears about potential market drops. Then, in line with your responses, the program maps out a sensible asset mix of low-fee exchange traded funds or ETFs. The percentages allocated to each of the asset classes and specific investment funds reflect your age, goals and risk comfort level. The allure is that the robos will rebalance automatically back to your preferred investment fund proportions and some also perform tax-loss harvesting to shrink your IRS bill.

Bonus: Free access to high-level budgeting, investing and financial management software  >>>

The Allure of Robo-Advisors

Robo-advisors can simplify your investing. With rebalancing, fund selection and management, you can get a diversified portfolio managed for a low fee. There are even specialized digital advisors such as the Grow Invest App and the new Motif offerings that allow you to invest with your values.

In fact, even if you manage most of your money yourself, or like to speculate with momentum strategies or digging for value stocks, there may be a place for an automated portfolio manager for part of your investment portfolio.

Reasons to Invest With a Robo-Advisor

You might consider a robo-advisor if you’re overworked, loaded down with family, kids and commitments with no time or interest to create that ideal investment portfolio. Or, maybe you have a mix of investments, without any over-arching investing plan.

In fact, even if you enjoy investing and have some investment expertise, you might want to consider turning all or a portion of your investments over to a robo-advisor. Although most robo-advisors charge a small management fee, it may be worth it to consider investing with a robo-advisor to streamline your finances.

So, if you’re considering letting a robot help with your investments, the question remains – how to choose the right robo-advisor for you?

7 Questions to Ask When Choosing a Robo-Advisor

If you’re thinking about trying out one of the digital investment platforms, here are some guidelines. Before picking an automated investment manager, assess what you want from the robo by considering these questions.

1. Do you want a combination of DIY and guidance? Several robo-advisory companies have models that will take over some of the investment tasks and still let you have a hand in the process, like M1 Finance or Motif. If you’re hesitant to completely turn over your investing reigns to a robot, these combination platforms are ideal.

Until recently, Motif wasn’t a typical robo-advisor but a site where you can create your own mutual fund. For a low fee, Motif allows you to buy a basket of 30 stocks, of your own choosing or from a pre-decided package such as “dogs of the DOW”, socially responsible investing, political themes, brands and more. You can even earn some cash if others choose your individually created Motifs. Although, Motif just added on their Motif Impact for a more automated investment option.

2. What types of investments do you want? Each of the robos has a different twist on their offerings.

If you are seeking a portfolio with small-, mid-, and large-cap value funds, then Betterment might be for you. In their bond offerings, Betterment also includes municipal and international bond funds.

WiseBanyan, one of the free financial robo-advisors also includes a real estate investment trust ETF in their offerings. While the Schwab Intelligent Portfolios pick from 54 low-fee ETFs to craft your investment portfolio.

3. How much money do you have to invest? If you’re just starting out, you might prefer a no fee, no minimum robo-advisor. Wise Banyan’s $1 entrance charge and free management for their basic service is a viable option. Plus, this robo-advisor also pays you a fee, if you refer friends.

There are other low minimum and low-fee robos geared towards the beginning investor such as Wealthfront and Betterment.

4. Will a robo-advisor manage my investments in my existing account? If you don’t want to transfer your investments to another site, FutureAdvisor and SigFig will manage them where they are. And both Personal Capital and FutureAdvisor provide access to cool financial management tools, for free.

5. Are there robo-advisors that also offer human financial advisors? If you’re a sophisticated investor or seeking some human guidance, several robo-advisors can help.

It’s becoming popular to offer a hybrid approach with access to one or more sessions with a CFP® along with the computerized investment management algorithm. Personal Capital has a slate of financial advisors available for their managed portfolios. Also, Betterment just initiated two human financial advisor tiers to their basic service.

6. Does the robo-advisor offer various types of accounts? What if you’re seeking a specific type of account, maybe a trust or SEP IRA? In that case, you might explore Betterment or some of the other firms that offer an array of investment accounts. In fact, Wealthfront recently set up access to a 529 College Savings account for their clients.

7. Can I invest in a robo-with a dedicated app? Most of the robo-advisors have excellent apps for iOs and android. Yet, if you want a simple financial advisor that prioritizes their app, then you might be interested in WiseBanyan, Grow Invest or one from this list of 10 Top Money and Investing Apps.

Once you’ve organized what you’re looking for in a robo-advisor, then you’re ready to compare. There are many ways to do this. You could go to each robo-advisors’ website and read through all of their features. Or, you might choose an online robo-advisor comparison chart.

The Takeaway on How to Choose a Robo-Advisor

As more and more varieties of robo-advisors emerge, their utility also expands. Although housed under a single umbrella, robo-advisors aren’t all the same. Their available funds, access to individual stocks, advisor availability, asset allocations, account types and add on services differentiate the firms.

Finally, if you decide to let a robo-advisor lighten your investment management load, check under the hood and find the one that’s right for you.

A version of this article was published on Seeking Alpha

Personal disclosure: I have an investment in WiseBanyan and I personally use the Personal Capital Dashboard.

Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.

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Barbara A. Friedberg, MBA, MS

Barbara A. Friedberg, MBA, MS

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