If you have ever wished for a robot to do the dishes or pack school lunches in the morning, you are going to like the concept of Robo-investing. Even though Robo-advisors are not new to the market (the first one was launched in 2008), very few people understand how robos work and the benefits of using one.
The truth is, the invention of ETFs (exchange-traded funds) and Robo-Advisors created tremendous value to new individual investors – to those who otherwise would have been entirely left out or paid much higher fees to financial advisors and brokers.
After reading this post, you will have a better understanding of what are Robo-Advisors and how they work; the advantages and disadvantages of using one; who should consider using Robos; and finally, the most up-to-date ranking of best Robo-Advisors prepared by an independent research firm that maintains real accounts at all the Robos. Let’s dive in.
What is a Robo-Advisor?
A Robo-Advisor is an algorithm-driven investing platform that automates the process of building and managing your investment portfolio to help you reach your retirement and other financial goals.
Robos’ services range from automatic rebalancing to tax optimization and involve little to no human interaction (although many companies provide access to human advisors).
You can open either tax-advantaged individual retirement accounts (IRAs) or taxable brokerage accounts.
Additionally, many Robo-advisors are now offering sub-portfolios to help you save and invest for various personal finance goals. For example, a growth-oriented asset mix for longer-term goals like retirement and a more conservative mix for a medium-term goal like saving for a down-payment on the house.
Also, many robos are offering traditional banking services like savings accounts.
Are Robos Regulated?
Raise your hand if you picture a guy in a suit when I say “401(k),” and then you imagine a robot when I say “Robo-Advisor.” Many of you are wondering if you can trust your hard-earned dollars to some financial robots.
First, Robo-advisors are regulated by the Securities and Exchange Commission (SEC) as Registered Investment Advisors (RIAs), meaning they have a fiduciary responsibility to look out for your best interests regarding investment choices.
Second, they generally insure their accounts via the Securities Investor Protection Corporation (SIPC).
And third, Robo-advisors already manage close to $393bn of assets linked to employer-sponsored retirement plans. That’s your 401(k)s, folks! Already managed by robos.
Those plans account for half of the money invested with Robo-advisors.
How do Robo-Advisors work?
The onboarding process is usually pretty straightforward. First, you will go through a survey asking about your current finances, your financial goals, your investment horizon, and your risk tolerance.
Based on your answers, the Robo-advisor creates a portfolio of investments to meet your goals. Usually, robos invest your money in low-cost, diversified index funds and ETFs. Some Robo-advisors will have human advisors available to discuss your options, fine-tune your portfolio, and answer questions.
Pros of Using a Robo-Advisor
If you feel overwhelmed by the idea of picking investments for your portfolio, a Robo-advisor will do that for you. With a few clicks of a button, you can adjust your risk tolerance, move money into your account and start investing.
Moreover, the Robo-advisor will rebalance your investment portfolio for you automatically, so you don’t have to worry about your asset allocation staying on target.
One of the most attractive features of robos is that they have low investment minimums and charge lower fees compared to traditional financial advisors. You can start investing with as little as $5 and pay no management fees at all (for selected robos).
Typically, management fees for Robo-advisors fall in the 0.25%-0.5% of assets under management. So, for example, for an account balance of $10,000 and a management fee of 0.25%, you will pay $25 a year.
This compares to 1% and more for traditional financial advisors. That 1% fee will cost you 26% of your portfolio over 30 years. I am just saying. I am not entirely against working with a financial advisor because some of them are totally worth it.
Additionally, you will most likely pay lower fees on your investments (the expense ratio, or the cost of the investment) because Robo-advisors usually invest your money in low-cost index funds.
Robo-advisors invest in ETFs, which are tax-efficient investments, to begin with. Then, they will automate tax-loss harvesting – selling securities at a loss so you can save on capital gains taxes.
Cons of Using a Robo-Advisor
Lack of human touch
Some people enjoy having a personal connection with a financial advisor. They know the names of your kids, and they can hold your hand through a big market selloff and not let you panic.
They’re not suitable for everyone
Robo-advisors are not suitable for every type of investor. If you like to pick your own investments and rebalance your portfolio (hello, it’s me!), working with a Robo doesn’t make sense.
Also, if you are trading GameStop stock all day, Robo-advising investing platforms are not your thing.
Finally, if your financial situation is complicated and you’re looking for comprehensive financial advice beyond investing in index funds (for example, estate planning or investing in private equity), working with an experienced financial advisor might be a better fit for you.
Who should consider using a Robo-Advisor?
Usually, working with a Robo-advisor might be the right choice if:
- You are a new investor
- You do not have a lot of money to invest
- You are cost-conscious and don’t want to pay high management fees
- You don’t know how and don’t want to choose your own investments
- You enjoy using digital tools and have access to your investments at your fingertips
- You are not looking for more comprehensive financial planning services.
Best Robo-Advisors in 2021
This Robo Ranking was performed by Backend Benchmarking – a research firm that opens accounts at the largest robos and ranks their services, compares portfolios’ performance, and overall helps investors make better choices with respect to their Robo-advisors.
Backend Benchmarking compares Robo-advisors across more than 45 metrics, including features, financial planning, customer experience, access to live advisors, transparency, size and tenure, account minimums, costs, and performance.
Base on this report, I’ve created a spreadsheet ranking the top 20 Robo-advisors by a range of factors along with a simple fact sheet describing each Robo, such as fees, account minimums, etc. You can download it here. I hope this ranking will help you decide which Robo-advisor is a better fit for you.
Everyone’s needs are different, but here is a snapshot of the best robos based on what you’re looking for.
Best Robo for Performance at a Low Cost
- Winner: SoFi Invest
- Runner-up: SigFig
Both Robo advisors are a great choice for investors looking for a strong performance track record and low fees.
Best Robo for First-Time Investors
- Winner: Betterment
- Runner-up: SoFi
Best Robo for Digital Financial Planning
- Winner: Wealthfront
- Runner-up: Personal Capital
- Honorable Mention: Schwab
Best Robo for Complex Financial Planning
- Winner: Vanguard Personal Advisor Services
- Runner-up: Personal Capital
- Honorable Mention: Ellevest
The Bigger Picture
If you’re looking for low-cost financial advice and automated investing, a Robo-advisor might be a good fit for you.
If you’re already considering working with a Robo-advisor, download the latest Robo ranking to have more facts at your disposal so you can make a better decision.
index fund investing, investing, robo-advisors