A robo-advisor is an automated, digital investment platform that uses algorithms to provide investors with the best financial and investment management solutions, with moderate-to-minimal human intervention. Considered to be a breakthrough in formerly exclusive wealth management services, these self-guided wealth management platforms automatically manage and optimize clients’ assets (or money), bringing financial services to a broader audience with lower cost, compared to traditional human advisors.
Robo-advisors typically allocate investors’ money in many investment products such as stocks, bonds, futures, commodities, real estate, etc., based on risk preferences and desired target return. Unlike traditional, expensive human-to-human financial advisors, robo-advisors provide personalized, automated financial advice at relatively low risk and low fees.
How does it work?
Step 1 – Tell us about yourself: It all starts with signing up a process in which you fill out questions about your age, retirement goals, investment goals, investing style, time horizon, and risk tolerance. Based on this information, the robo-advisor will create a portfolio for you.
Step 2 – Portfolio management: The platform recommends a model portfolio that aligns with your goals. The portfolios are composed of exchange-traded funds (ETFs) that have been recommended by the pros at Morningstar Investment Management, LLC.
Step 3 – Auto portfolio tracking and rebalancing: Backed by investing professionals at TD Ameritrade Investment Management, the robo-advisor provides the monitoring and automatic rebalancing to help keep your portfolio on track, helping you reach your goal as efficiently as possible.
Step 4 – Stay connected and engaged: You can log in on your portfolio as much, or as little, as you want. With the Portfolios App, you can track your progress, deposit/transfer funds, and keep tabs on your money on the go.
According to some reports, tens of billions of dollars are currently being managed by robo-advisors, and some estimates indicate that robo-advisors could be managing hundreds of billions, and possibly even trillions, of dollars in just a few years.
There are several reasons why investors choose to use robo-advisors today, as opposed to traditional portfolio managers. They are as follows:
- Low fees are the single most significant advantage of robo-advisors They charge around 0.25% on a $50,000 investment, contrast to the typical price of 1% charged by human advisors. Robo-advisors cost an estimated 70% less in fees and commissions than more traditional advisors.
- Robo-advisors have a much lower, initial investment requirement, as low as $500. Some robo-advisors like Betterment allow balances as little as $1.
- Most of robo-advisor’s algorithms rely on best investment theories to create an investment portfolio with the highest return for the smallest risk.
- You could get a portfolio recommendation in 15 minutes or less.
- Robo-advisors can help you create a long-term investing plan; you can “set and forget.”
- Robo-advisors are available when you need them, as long as you have an internet connection.
- Your portfolio is automatically rebalanced to help you stay on track.
- Robo-advisors offer services like rebalancing to maintain your portfolio allocation even after gains in one sector.
- The funds in your portfolio are carefully selected by experienced professionals.
- Your portfolio is designed to be diversified to help manage risk.
- Robo advisors can minimize tax losses through tax-loss harvesting, a trading strategy that involves selling unprofitable stocks and replacing them with profitable stocks in the portfolio.
- Robo advisors have a lot of flexibility. Clients can set and even edit preferences, time horizons, goals, and other variables.
- Robo-advisors can tell investors how to allocate their money across stocks and bonds, keeping your risk tolerance in mind, how to take advantage of advanced tax strategies and how much to deposit each month based on the total amount they want to invest and their goals.
Now, let’s look at some of the top robo-advisors in the market.
Founded in 2008 by Jon Stein and officially launched in 2010, Betterment is one of the oldest robo-advisor platforms with more than $15 billion investments from more than 400,000 users. Betterment made waves in the online investing industry by focusing on algorithmic portfolio investing, rather than labor-intensive and expensive human management that was the standard at the time. The company offers two service options: Betterment Digital, it’s legacy offering, has no account minimum and charges 0.25% of assets under management annually. Betterment Premium provides unlimited phone access to certified financial planners for a 0.40% fee and $100,000 account minimum. Betterment has no account minimum. They allow fractional shares investing, automatic diversification, rebalancing, and dividend reinvestment.
2. Personal Capital
Founded in 2009 and launched in 2011, Personal Capital is an all-in-one online financial platform with a suite of free planning tools, supported by personal consultation from a team of advisors. An excellent choice for anyone who wants to try an automated experience with regular access to a financial advisor, Personal Capital is a free personal financial analyzers-plus-dashboard and robo-advisor that manages portfolios, for clients with balances of $100,000 or more. The higher-net-worth clients are eligible to get a human, financial advisor, along with the platform. This service is not cheap, starting at 0.89% per year of assets under management, which is quite a bit higher than most robo-advisors. However, it is still less than 1% or more charged by traditional human advisors.
3. Schwab Intelligent Portfolios
Schwab Intelligent Portfolios is the robo-advisor product from Charles Schwab, one of the most significant investment companies in the United States. The right choice for investors who don’t want to burdened with extra costs; Schwab’s accounts are “free.” Schwab charges no advisory or management fees for Schwab Intelligent Portfolios, and you can open an account with a $5,000 opening minimum balance. Their portfolio of ETF offers a variety of asset classes, and asset allocation is the basis of Schwab’s investment philosophy. It employs automatic rebalancing and automatic tax-loss harvesting for accounts with a value greater than $50,000.
SigFig is best suited for those who already have exposure to investments. SigFig’s minimum account balance is $2,000, and accounts under $10,000 are free. SigFig offers two types of account: managed account and free portfolio tracker. If you can manage your account yourself, you can use the SigFig platform to streamline tracking with its handy dashboard tools. The managed account provides with its financial advisors a suite of features such as access to phone calls, asset allocation models, tax-loss harvesting, automated rebalancing, and automated reinvesting.
Wealthfront is another great robo-advisor which recently lowered its minimum investment to an affordable $500. Additionally, there are no account management fees for accounts with values below $10,000. There are no trading fees, and the underlying mutual fund fees average 0.16%. It provides a suite of portfolio management services and account types such as individual accounts, trust accounts, IRAs, etc. Clients who meet the $100,000 threshold automatically qualify for a loan up to 30% of their account balance. Beyond the above-mentioned features, Wealthfront offers several value-add features for all-size accounts.
|Betterment||$13.5 billion||0.25% to 0.5% of account balance|
|Wealthfront||$5 billion||0.25% of account balance|
|Personal Capital||$4 billion||0.49% to 0.89% of account balance|
|Acorns||$257 million||$1/month for accounts under $5,000; 0.25% of balance thereafter|
|SigFig||$120 million||Free up to $10,000; 0.25% of balance thereafter|
|WiseBanyan||$80 million||Free; extra fees for add-on services|
|Ally Invest||$60 million||0.003% annually|
|Vanguard Personal Advisor Services||$51 billion||0.05% to 0.3% of account balance|
|Schwab Intelligent Portfolios||$10 billion||Free|
|BlackRock Future Advisor||$700 million||0.5% of balance for Premium account; free for 401(k) advice|