Here’s How to Choose a Robo-Advisor
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.
Learn about this digital investing platform and how to choose a robo-advisor in a few easy steps.
*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.
What is a Robo-Advisor, and Why Should I Use One?
The basic robo-advisor model is constant, yet each individual company, put’s their own stamp on the tool.
Most robo-advisors ask you a few questions to understand your financial situation, age, and future goals. They also delve into how you’ll feel when the market has a downturn (as it does periodically).
This initial questionnaire drives the type of investment portfolios the robo recommends.
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 of a robo-advisor is that they will manage your investments for lower fees-typically between zero and .89% of Assets Under Management – than those of a typical financial planner, who charges 1.0% of AUM and up.
Another constant with robo-advisors is that when your investments drift from your preferred asset mix, they’ll rebalance them.
Robo-advisors also distinguish themselves with individual features such as:
- Human financial advisors
- Tax-loss harvesting
- Cash Management
- Socially Responsible Investing
- And more
ROBO-ADVISOR SELECTION WIZARD – Choose a robo in a few minutes.
In fact, even if you manage most of your money yourself, or like to speculate with momentum strategies or digging for value stocks, there is a robo-advisor for you.
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.
- You have a mix of investments, without any over-arching investing plan.
- You enjoy investing and have some expertise, but want the ease of letting a robo-manage some of your investments.
Although most robo-advisors charge a small management fee, it may be worth 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 a robo-advisor that’s best for you?
9 Questions to Ask When Choosing a Robo-Advisor
1. Do you want a hybrid robo-advisor who also offers human financial planners, along with digital investment management?
Some robo-advisors are all digital, like Wealthfront. Although Wealthfront has one of the best financial advisor questionnaires we’ve seen!
Other robo-advisors offer a combination of digital and live human investment advice like these hybrid robo-advisors with human financial planners:
- SoFi Invest – fee free investment management and financial advisors
- Betterment – low fee financial planning packages available
- Empower – full service financial planners
- Ellevest – Discounted financial planning packages
- Vanguard – Personal Advisor Services
So, if you feel like you need access to live financial planners, choose from the hybrid robo’s.
2. Are you concerned with robo-advisor management fees?
When you invest with a robo-advisor, you’ll pay two types of fees:
- Small ETF management fees that actually go to the specific investment fund, not the robo-advisors. These are usually quite small and range from .04% to .10% of assets managed.
- Robo advisor management fees which cover the cost of re-balancing and managing your investments. These go directly to the robo and range from zero, at SoFi Invest, Ally, and Schwab to 0.89% for some of the robo’s that offer specialty services and portfolios.
If cutting fees is a priority, then you’ll probably be interested in these low fee robo-advisors.
Lowest Fee Robo-Advisors
|Robo Advisor||Management Fee||Investment Minimum||Sign up|
|0.25% of AUM (Special promotion!)||$500||Sign up|
|0.25% of AUM||None||Sign up|
|0.25% of AUM ($10,000 managed for free)||$2,000||Sign up|
|Basic-None Premium-$30/month ($300 set up fee)||$5,000||Sign up|
3. 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.
Ellevest, also has a very wide selection of investment funds including 10 types of bond funds.
M1 Finance is unique in that it offers pre-made investment portfolios that it will rebalance for you, and the opportunity to invest in 1000’s of specific stocks and funds as well.
If you’re hesitant to completely turn over your investing reigns to a robot, M1 Finance is ideal. M1 Finance offers pre-made customized portfolios and self-directed investing in stocks, ETFs and crypto.
Many robo-advisors offer socially responsible investing including Sustainfolio which is focused on these types of investments.
If you want actively managed investing, instead of the typical passive, index fund investing, then you might want to consider robos that strive to beat the market, not just match it.
Here are several robo-advisors that offer active investing strategies:
While, Fidelity Go only offers a diversified mix of fee-free mutual funds.
Just realize that more funds doesn’t necessarily correlate with higher returns.
4. How much money do you have to invest?
If you’re new to investing and want to start small, there are many robo-advisors with low or no investment minimums.
With M1 Finance, Betterment, Ellevest, and Ally Invest you can get started with less than $100.
Today, there is really no reason not to begin investing for the future.
If you’re just starting out, you have access to both no fee and low minimum investing with robo-advisors.
Take our Robo-Advisor Quiz to help you choose.
5. 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.
This is a nice feature for investors that have pre-existing investment accounts.
Although, in many cases, the robo will recommend that you sell some of your assets and replace them with recommended funds.
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.
For investors interested in saving for college, Wealthfront offers a 529 College savings account. At present, Wealthfront is the only digital investment manager that offers access to this educational investment account.
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 one of our featured 10 Top Money and Investing Apps.
We also like app-based Titan Invest with special investment styles that attempts to beat market returns.
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.
8. What other services does the robo-advisor offer?
As the robo landscape grows with new entrants, consumers benefit with more services.
M1 Finance is unique with pre-made passive portfolios and the opportunity to pick your own stocks and funds.
Lending is a big feature at a few robo’s like M1 Finance, Wealthfront, and of course, SoFi.
Many platforms are also adding checking and cash management. This is great if you want to consolidate your investing and spending under one roof. With recent higher interest rates, opening a high yield cash account (managed through partner banks) makes good sense. The Wealthfront and most other robo advisory cash management do not charge management fees on the cash account.
Tax-loss harvesting is good if you have a taxable investment account. This process can cut your tax bill and might even increase returns.
Ellevest even offers career consultants, a unique feature if you’re considering a job change.
While Empower Advisors also offers extensive financial management services like estate, and tax planning.
9. Should I pick a platform with high robo-advisor returns?
Investors occasionally make the error of choosing and investment fund with the best past returns. You would think this is a sound method to choose a robo-advisor.
Yet, have you ever seen the statement “past performance is no guarantee of future returns”?
That’s because robo-advisor performance is typically related to the asset allocation of the underlying investment funds. For example, if large cap stocks outperform, like they have recently, then a robo with a large allocation to this asset class, will generally outperform a fund that tilts towards value investing, which has been out of favor recently.
Finally, it’s likely that certain asset classes and market sectors will drift in and out of favor. You’ll make a better robo choice by looking at the overall offerings of the robo-advisor and choosing one that fits with your personal preferences.
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.
- What Are The 8 Major Differences Between Robo Advisors?
- Robo Advisor Fees From Lowest To Highest
- Are Robo Advisors A Scam?
- Best Robo Advisors
- The Future Of Robo Advisors
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.
*Betterment is not a licensed tax advisor. Tax Loss Harvesting+ (TLH+) is not suitable for all investors. Read more at https://www.betterment.com/legal/tax-loss-harvesting and consider your personal circumstances before deciding whether to utilize Betterment’s TLH+ feature. Investing involves risk. Performance not guaranteed.
**Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities. For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance. Checking accounts and the Betterment Visa Debit Card provided and issued by nbkc bank, Member FDIC. Checking made available through Betterment Financial LLC. Neither Betterment Financial LLC, nor any of their affiliates, is a bank. Betterment Financial LLC reimburses ATM fees and the Visa® 1% foreign transaction fee worldwide, everywhere Visa is accepted.