Robo advisors and how to start investing in Robo Advisors, Online stocks, sometimes also known as automated online advisors, are technology-based investment platforms that offer fully automated online investing. These financial technology (fintech) firms are springing up quickly and target mostly new and younger investors (such as Millennials). But which one are the best choice for your investment preferences and risk? What features do they have in common, and how do they compare to each other?
Thanks to the rise in popularity of Robo advisors, investing for the future is now more accessible than ever. You don’t have to go it alone, be wealthy, have a lot of investment knowledge, or even hire an expensive financial advisor to create a decent asset allocation. Why? Because Robo advisors now have the technology to do all of this for you — and at a low annual fee to boot.
What Is a Robo Advisors?
There are many definitions of what exactly “Robo advisors” means. To put it simply, a robo advisor is a method to automate the asset allocation of investments via a computer algorithm.
In a broader sense, a robo advisor may also include human financial advisors but only for services that require human assistance (e.g., taxes, retirement, or estate planning)
Overall, I consider the rise and interest in robo-investing services a good thing, pushing down the costs of high-fee Wall Street advisors who offered no real value and, if anything, were a drag on returns. This is a positive in any competitive marketplace. In addition, these firms are helping individuals — who typically have no clue where to begin — with goal setting and asset allocation.
As with almost everything, one size does not fit all when it comes to financial advice. However, I do see this space-filling the need of most beginner investors and investors with uncomplicated financial portfolios.
How Do TheCoinrise Rate Robo Advisors?
TheCoinrise team has spent a lot time with the top robo advisors, evaluating each one to help our readers make informed choices about which service best suits their needs. So how do we judge them?
When rating robo advisor services, we take a close look at six crucial criteria:
- Commissions & Fees: How much do the Robo advisors charge its users to use its service? Is there a good value for your money?
- Tools & Resources: Besides just investing your money, what research, calculators, planning programs, etc., does the Robo advisor offer to help you maximize your investing experience?
- Customer Service: How can you access the customer service team… and when? Does the robo advisor have a call center open on the weekend? Can you access help by live chat?
- Investment Options: What kinds of accounts can you invest in with the robo advisor? Does it offer both taxable accounts and IRAs?
- Ease of Use: Does the robo advisor’s user interface make sense? Does it have a mobile app that’s seamless? What kinds of accessibility options does the robo advisor offer?
- Asset Allocation: How does the robo advisor’s algorithm take asset allocation into consideration? Can it invest in a diverse portfolio with commodities, real estate., etc., as well as ETFs and mutual funds? And is the asset allocation automatically rebalanced?
The Best Robo Advisors 2019 October
Taking into consideration the criteria above, we have selected five that consistently score high marks.
Wealthfront Robo Advisor
Wealthfront may have been designed to appeal particularly to Millennials — with a focus on using automated advice to save for the long term — but there’s plenty to appeal to all demographics here. In fact, we have consistently rated Wealthfront as one of the very best robo advisor services on the market, and we strongly recommend that you try it.
What makes Wealthfront Robo Advisor so special?
- You can start with its low fees (only 0.25% per year or free if you just want to use the financial planning app) and doable minimum investment ($500). But you should also take into account its wealth of investment options and tools that truly democratize the investment process.
- Wealthfront’s Path algorithm can help you save for retirement, a home purchase, or your kids’ education. You’ll get the kind of planning advice you could usually expect from a high-priced personal advisor.
Other unique features include an interest-paying cash account that requires only $1 to open and tax-loss harvesting for all accounts, regardless of size. There are lots here to explore and use to your advantage.
Betterment Robo Advisor
Betterment was one of the first — if not the first — robo advisor to crop up, but that doesn’t mean it hasn’t remained on the cutting edge. Fees are low (0.15-0.40%, depending on the size of your investment and the level of service you choose), and there’s no minimum investment required to get started.
That makes Betterment particularly appealing to beginning investors. This is definitely not a product designed for the DIY investing crowd — you can expect to “set it and forget it” with this robo advisor service.
One thing that sets Betterment apart from the competition is its Premium plan, which offers unlimited access to CFP professionals for guidance on saving up for major life events. These human advisors can help set you on the right path for marriage, children, retirement, or any other big step. You’ll also receive advice on your accounts beyond Betterment.
Personal Capital Robo Advisor Investing
Personal Capital is a Robo advisor and then some. This service combines the investing capabilities of a traditional robo advisor platform with general personal finance functions such as expense monitoring and budgeting.
You can use Personal Capital’s app for free to receive regular summaries of your spending, net worth, and investment portfolio. It can help you determine if you’re on target for your retirement, even if you have decades to go. If you want to pay for wealth management services, though, you’ll pay 0.49-0.89% annually (depending on the size of your account). You’ll need $100,000 for this premium feature.
Ellevest Robo Advisor
Ellevest was created with a mission in mind: to address women’s special investment needs. The founder, former Wall Street exec Sallie Krawcheck, wanted to tighten the wide gap she saw between men and women when it comes to investing for the future.
At first, it may sound silly, but women do have special financial considerations. They’re more likely to take time off work to care for children or elderly parents. They tend to live longer and have steeper retirement-age medical bills. And then there’s the big elephant in the room — they earn less than their male counterparts.
Ellevest seeks to make investing for the future easier. Low fees (0.25-0.50% per year) and no minimum required investment are definitely a good place to start.
Blooom Robo Advisor
Bloom Robo Advisor. If you want to check the health of your 401(k) plan — and fix it — check out Blooom. For only $10 per month, this unique robo advisor can monitor and manage your 401(k), 401(a), 403(b), 457, or TSP plan.
It will eliminate funds that aren’t doing you any favour and choose new ones with an asset allocation more closely aligned to your goals. Blooom works with many different plan providers. If your employer-sponsored plan has online access, Blooom can handle it. The biggest drawback is that it doesn’t work with your other retirement accounts, such as IRAs.
Largest Robo Advisors by Assets Under Management
Assets under management (or AUM) refer to the market value of the investments managed by the robo advisor for its clients. It’s how we measure the size of a robo advisor.
Although a large AUM is a good indicator that it’s a good Robo advisor — after all, apparently a lot of people are trusting it with a lot of money — it’s not the only criteria you should consider. There’s more to finding a Robo advisor service that suits your particular needs in reaching your investing goals. Take into consideration our six criteria above, and then look at AUM.
Is Robo Advisor Investing Right for You?
The answer to this question depends on your net worth, the complexity of your investments, and whether you feel comfortable enough doing it yourself. I’m definitely not in the camp with those who say that these robo advisors add no value and that you could easily replicate their results yourself just by using Fidelity or Vanguard funds.
In my case, most of our assets are DIY, but I’ve also been studying Robo advisors for years and feel comfortable using them. Other individuals may not, and I get that.
Which Kind of an Investor You Are?
Keep in mind that what robo advisor firms are offering is not unique. A target date mutual fund has some similarities. All of the robo advisor firms base their automated investment guidance on Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH), and a series of questions to determine your risk profile.
While this investment strategy isn’t perfect, it sure beats what most individuals have: nothing. In reality, inexperienced investors usually have a hodgepodge of investments with no asset allocation, actively managed funds, high annual fees, and whatever “stock du jour” their peers recommend investing in.
Firms like Wealthfront focus on the end goal and are ideal for individuals who don’t care or who don’t want to learn about the details of investing. For these individuals, the 25 basis points (otherwise known as a 0.25% annual fee) or less they pay is well worth it and in many cases much better than hiring an FIA — in terms of both cost and good financial advice.
Difference between Robo Advisors
To the casual reader, the differences among robo advisor firms might seem minor, but in reality, they’re not. You have a choice when it comes to:
- Minimum Deposit — With some firms, you can start out with nothing, while others require sizable amounts to invest.
- Annual Fees — Be aware of hidden costs and fees for the ETF a robo advisor purchases on your behalf.
- Asset Allocation — Asset allocation can vary quite a bit based on your age and the way you answer the service’s risk assessment questions.
- Account Type Support — Does the robo advisor offer individual or joint accounts, IRAs, etc.? Can the robo advisor assist with your 401(k) plan?
- Automation — Some services are 100% automated vs. human-assisted advice.
- Tax Optimization — Services such as tax-loss harvesting can help at tax time.
- Custody of Funds — Managed either by you, in which case the robo advisor gives trading advice, or directly by the firm.
- Management of Assets — Manage all your assets or just a portion.
- End Goal — Retirement-only or other goals (e.g., college education).
Out of all the services, Personal Capital is among the most expensive but also has the most human interaction with its clients. It could be said Personal Capital is much more of a traditional financial advisor that uses technology to assist. Personal Capital’s fees also include trading fees, and it recommends mostly individual stocks to minimize expenses and taxes as well. So its true cost might be more in line with the other firms mentioned.
Cost is an important consideration when picking your robo advisor. Be aware the Robo advisor fees are only for its services — it doesn’t include the fees on the ETFs it purchases on your behalf. If you’re curious, I’ve researched the popular Robo advisors and broken down the true annual costs of each.
Is the Robo Advisors Technology New, and Can It Be Trusted?
The online tools robo advisors offer aren’t new. Traditional financial advisors had the same tools available to them for years and could roll up a personalized asset allocation plan specific to you. Heck, this stuff was available in 1999 when I first used an advisor at PaineWebber. Like self-checkout at Home Depot (HD), this is pushing the technology down to the masses. You have direct access to manage your account, and it removes the no-value-added middle men.
Let me be clear: Some financial advisors can add tremendous value. They can give guidance to the asset allocation best for you based upon unquantifiable factors, which computer programs can never do. But I believe this is more the exception than the rule.
Financial advisors can give recommendations about long-term life decisions (e.g., helping plan for a child’s education through a recommended action plan). In fact, some of the robo advisors mentioned in this article are just tech-assisted firms and not 100% automated. If you want it, the human element is not completely removed from the loop with some of these firms.
There’s something to be said for any 100% algorithm-driven investment approach. While it might help with a high percentage of individuals, there are always cases in which automated guidance isn’t appropriate.
Can Robo Advisors Replace Traditional Financial Investment Advisors?
Previously, when investing, your choices were pretty limited. You had only two options to choose from:
- Do-it-yourself (DIY)
- Hire a financial investment advisor (FIA)
Historically, there’s been a problem with trying to get an FIA: Many have minimum asset requirements of $500,000 or more. These requirements put many FIAs out of reach for younger and lower-net-worth individuals.
So if you fell into this category, you had to fend for yourself or get generalized advice from a financial guru like Suze Orman (don’t get me started).
In addition, it’s not uncommon for FIAs to charge 1-2% annually (or even more via the loaded investment products they push you into). That’s 1-2% you have to do better than the market just to keep up. As history has shown, this is a steep fee to overcome, and in many cases, FIAs also came with substandard financial advice to boot.
Let’s also not forget that — if the investment advisor isn’t a fiduciary — they may not offer investments in your best interest but recommend investment products that best line their wallets.
If you went the DIY route, you might have found you aren’t cut out to go it alone. Gone are the days when everyone who retired automatically got a gold watch and a pension (which was managed by a professional). Today you are required to self-fund your own retirement.
401(k) plans and IRA accounts put you in the investment driver’s seat. But it’s more than likely you haven’t read up on investment analysis. Worse yet, you may have poor investing psychology and jump out of the market at the absolute worst times (buying high and selling low).
Should I Invest With a Robo Advisor?
The ultimate question is: Should I use a Robo advisors instead of doing it myself, or should I use a traditional advisor? In many cases, yes, aRobo advisor is a solid choice.
A robo advisor is a good fit if you:
- Are Young — with more than 20 years till retirement.
- Have a Simple Portfolio — no accounts with other financial services.
- Lack Investment Experience — unsure about where to begin.
They don’t cost much to use, and in my opinion, most create a decent asset allocation. These services will give you a good starting point.
As your needs change, you could always move your money to another financial service. By then, some of these same services will have advanced and might automate more of what previously required a human.
Are they perfect? No. It can be said if you have the skills you might be better off rolling your own, or a target date fund may be all you need. But then again, that’s not the audience these companies are targeting. They’re filling a niche in the investment advisory space that’s been ignored for years.
If you want estate planning or if you have issues that don’t fit the typical investment planning mould (e.g., you have a child with special needs), then you might be better off with a traditional advisor. Or a Robo advisor service that can help customize your asset allocation.
In my opinion, however, it’s no question robo advisors are the future of the financial industry for the most basic advice.
Just as Vanguard revolutionized investing in indexed-based low-cost funds, Robo advisors are doing the same with asset allocation for the masses.