In simplest terms, the robos combine computerized trading with advice, for a fraction of what you would pay for a financial adviser.
The computerized trading follows a model that was drafted by a financial advisor or economist. Most of the models consist of exchange-traded funds (ETFs) reflecting the investor’s risk appetite, objectives and time horizon.
From there, the computerized trading relies on algorithms to execute transactions at a level of sophistication and speed that has only been available to professional investors.
The automation periodically maintains the original strategy of the portfolios by rebalancing, dollar-cost averaging (a type of buying strategy where buy a fixed dollar amount of securities at regular intervals) or harvesting capital losses or gains on taxable accounts.
The reliance on automation enables lower fees than what human financial advisors charge, although overall the method with which the fees are applied is often similar: A (fraction of a) percentage of the total portfolio value is charged annually.
Performance and Volatility
Some of the companies in this space demonstrate strong performance — or at least they did until the markets increased in volatility.
Robos aren’t a way to handle market turbulence but rather a way to keep fees from interfering with your overall account appreciation.
Although this category of financial service continues to attract more assets and hype, it has limitations worth keeping in mind.
When to Work with a Human Financial Advisor
If you need more personalized advice, you won’t get it from any of the robos, but you could always get the best of both worlds by also working with a human financial advisor.
A human financial advisor can give advice based on an investor’s current life situation and preferences.
The robo questionnaires usually don’t ask about investors’ beliefs or ideals, nor can they sense whether someone is confused about their goals or risk appetites.
Robos also can’t handle certain kinds of complex financial planning like setting up estates, making insurance recommendations and coaching on budgets.
Best of Both Worlds
If any of these areas sound like things you might need, you could always hedge your proverbial bets: Don’t choose one over the other, but go with both. Tap a human financial advisor for some situations and a robo for others.
Although robos use the same technology that is used by the algorithmic traders that are creating the market volatility of late, none of them can explain current market conditions to you the way a human financial advisor can.
More importantly, the algorithmic trading capabilities that characterize robo-advisors isn’t going to move you around a lot in a volatile market because that gets prohibitively expensive if you don’t have your own FINRA credentials.
So if you don’t like volatility, you just might like minimum volatility ETFs instead. Perhaps one of the robo-advisors might include them in its portfolio recommendations.
Which Is the Best Robo-Advisor?
Here’s a look at the different companies in this space, along with their fees and strategies. Some also include yields, where disclosed.
If you’ve had a hard time disciplining yourself to save or invest, this robo is for you. It effectively invests what would otherwise be your spare change. You enable Acorns to take as deposits the difference from the next-highest whole dollar amount on every bank card transaction you perform.
You still get to set a maximum amount per month. Best of all, you can get money added to your account in reward for taking advantage of deals with participating merchants.
Fees: For assets below $1 million, pay just $1 to $3 per month for one of three tiers of services.
Strategies: Acorns suggests strategies based on your income, time horizon, goals and risk appetite.
This online bank’s offering in the robo-advisory space appears to have gotten less attention than many of the others in the category, despite having among low fees and being easy to use.
Fees: Pay just 0.3 percent of the portfolio balance annually, with a $2,500 minimum account size.
Strategies: Suggested portfolios appear to reflect about nine different levels of risk tolerance, three different types of goals, and five different general time horizons.
In one important sense, this company has more transparency about its robo strategies than the others listed here –by virtue of being the only one that publishes historical performance data on three-, five- and 20-year horizons for the portfolios. Click here to see that data.
Fees: The company’s fees are based on the amount of assets you add to an account — the minimum size of which starts at $50,000. Put in that starting amount and you pay the maximum fee of 0.45 percent annually, but that eventually scales down to 0.2 percent annually if you put in $20 million or more.. The company also sells retirement-related services for 0.5 percent annually. Additionally, the site charges commissions on individual trades of $11.95 per transaction.
Strategies: The site has eight strategies at different points on a spectrum of lowest to highest risk. The two most conservative strategies are referred to as capital preservation. After that comes a strategy called balanced.
Although better known for its robo-advisory offerings, this company can also match you up with a human financial advisor. The fees and strategies below involve the robo stuff, however.
Fees: The company charges 0.25 percent annually for what it calls the digital level of service and 0.40 percent annually for a premium level.
Strategies: Betterment works with five general categories of investing goals — saving for retirement, retirees withdrawing income, emergency funds, general investing and preparing for a major purchase. You’re allowed to choose more than one of them. The suggested portfolio is further customized based on your stated time horizon and your risk tolerance.
This outfit gives the robo treatment to your retirement plans that would otherwise not get any third-party attention.
Fees: There’s a flat rate of $10 per month.
Strategies: The company takes over the management and monitoring of your retirement plans provided by employers — any 401(k), 401(a), 403(b), or 457 and optimizes your fund selection in a way that maximizes performance and minimizes hidden fees.
This particular robo has some things in common with Acorns. Only here’s what’s different with Clink: You schedule how often you wish to contribute to the account — daily, weekly, biweekly or monthly — and exactly how much to put in each time — from $10 to $500 per deposit.
Fees: For accounts with less than $5,000 in them, Clink charges $1 a month; otherwise it’s 0.25 percent of your total balance annually.
Strategies: With the intention of simplifying investing, Clink suggests just a handful of portfolios of ETFs that it recommends based on how aggressive you want to be.
This company markets a full range of financial services to women, and as part of that offers a robo-advisor product.
Fees: For accounts under $1 million, the annual fees are 0.25 percent of the balance of the portfolio for a basic account or 0.5 percent of the balance for premium.
Strategies: Ellevest creates portfolios based on the investor’s risk tolerance, time horizon and goals; the latter can include saving up an emergency fund, down payment on home, new business, children, retirement, and building wealth — you can also choose more than one of the aforementioned goals.
This leader in the world of online brokerage has a line of robo-advisory services that offer a wee bit more advice than the self-service style of trading that the rest of the business is based on.
Fees: Depending on the amount of money you invest, the strategy you choose, and the amount of attention from a human financial advisor that you want, annual fees can range from 0.3 percent to 1.25 percent.
Strategies: A dedicated financial consultant helps you build a fully custom portfolio that’s monitored and actively managed for you. There are three general groupings of services — the first tier is known as core portfolios and has a minimum balance requirement of $5,000; the next level up is blend portfolios, which has a minimum balance requirement of $25,000; and the top tier is fixed income portfolios with a $250,000 minimum balance requirement.
This mutual fund giant has teamed up with Strategic Advisers, National Financial Services and Geode Capital Management to offer a robo-advisory service.
Fees: They range from 0.35 to 0.4 percent annually.
Strategies: This service suggests strategies based on your goals, time horizon and your risk appetite (on a scale of one to 10).
This company sells robo-advisory services to other companies as a front-end for employer-sponsored retirement plans.
Fees: They have ranged from 0.2 percent to 0.6 percent annually.
Strategies: The company offers a robo-advisor type of interface for retirement plans, and is in the process of merging with Edelman Financial Services — a deal that might close in the third quarter of 2018.
This robo focuses on fixed income, clarifying that its offerings are intended for inclusion in an overall portfolio strategy.
Fees: The company claims it recommends a bond strategy without charging you anything — then directs you to Interactive Brokers to transact. Presumably IncomeClub gets some kind of commission on the back end.
Strategies: Everything suggested by IncomeClub involves fixed income in one form or another. Depending on your time horizon, risk appetite and objectives, this site might suggest money market funds, certificates of deposit, federal government bonds, municipal bonds, corporate bonds, international bonds or combinations thereof.
Open an account with this particular robo-advisor and you too can have the same kind of killer investment performance that the Yale University endowment is famous for. The brains behind said wonder-fund, Dave Powell, just so happened to create FutureAdvisor’s portfolio models.
Fees: The annual management fee is 0.5 percent of the value of your portfolio. Over 90 percent of the funds used by FutureAdvisor trade commission free, and for the others there are commissions of $7.95 per trade.Add in the expense ratio of the funds and you have a total fee of about 0.65 percent a year.
Strategies: Designate whether your risk appetite is conservative, moderate or aggressive — then convey your time horizon and FutureAdvisor suggests a strategy based on that.
This robo offers a couple of tiers of service based on the amount of assets you invest there.
Fees: Pay 0.3 percent to 0.75 percent annually, depending on the amount you invest (the more money you put in, the lower the percentage gets).
Strategies: Hedgeable offers three tracks of services — building wealth is for saving up money in a retirement account, trust, taxable, joint or custodial account; small business is for those using business income to contribute to a solo 40(k); and high net worth is for people who want to preserve a lot of money and grow it tax efficiently.
This web-based investing platform promises that its rebalancing algorithms can add up to 2 percent to the value of your portfolios.
Fees: Pay $14.95 a month or $195 annually.
Strategies: The company has three types of strategies — one of them intended to help you save for emergencies, another for retirement, and the third having more of a speculative goal.
Purists might say that M1 Finance’s business model only partly resembles a robo-advisor — that is, at the portfolio management stage.
Fees: The company states that it charges no fees to consumers.
Strategies: Instead of suggesting a portfolio, M1 Finance offers a visual interface for people to set up portfolios — and then maintains the portfolio allocation using algorithmic trading.
This old-school retail brokerage has expanded into robo-advisory services.
Fees: Pay 0.45 percent annually plus trades can have commissions of one to three cents per $1,000 traded.
Strategies: The company recommends different strategies based on your investment horizon, goals and risk tolerance — the latter is based on answers to a questionnaire.
This full-service investment house has thrown its hat into the ring with a robo service that just debuted in December.
Fees: Pay just 0.35 percent of the value of your portfolio annually.
Strategies: Morgan Stanley has portfolios modeled for specific goals like retirement, buying a car, education, building wealth, starting a business, saving for a wedding, buying a house, or making another type of large purchase. You also specify possible target dates, your risk appetite, and whether there are any specific areas of investing that you’re interested in.
This company offers free software to help you analyze your finances; it suggests ways to minimize your fees, and leads you toward its robo-advisory offerings.
Fees: If your account value is a six-digit number or lower, you pay an annual fee of about 0.89 percent of your portfolio value. Commit more than that and you bring the fee down.
Strategies: There are three tiers of services based on the amount of assets you wish to commit to Personal Capital. If you have $200,000 or less in assets, you’re in the tier that most closely resembles the robo model, where a financial advisor recommends a portfolio of tax-efficient ETFs and from there you’re all automated.
The next level up gets you more customization and advice; those with more than $1 million to invest get the private wealth management treatment, including full access to a financial advisor.
This company promises to save you 68 percent on fees associated with IRAs; from there, compounding enables you to capture more gains over the long term.
Fees: Pay just 0.5 percent of the value of your portfolio annually.
Strategies: The company suggests portfolios of ETFs suited for your risk appetite and time horizon.
For a discount brokerage with a history of no-frills, low-commission trading, Schwab’s robo-advisory service is surprisingly sophisticated.
Fees: Interestingly, Schwab does not charge advisory fees for its robo service. The company says there aren’t any hidden fees nor commissions and clarifies that it earns revenue from the underlying assets in the portfolios.
Strategies: Each portfolio contains up to 20 different asset classes, in proportions that are based on an investor’s risk appetite, current life circumstances and goals.
This company offers robo-advisory services directly to consumers and in partnership with other financial institutions (including Wells Fargo, mentioned elsewhere in this article).
Fees: Pay nothing for your first $10,000 (the minimum balance is $2,000) and 0.25 percent annually for every dollar above that amount.
Strategies: There are portfolios with conservative, moderate and aggressive growth strategies and tailored for different types of goals and time horizons.
Ideal for people who are new to investing, this mobile app suggests not just ETFs and other types of investments based on your preferences.
Fees: For accounts under $5,000, the first month is free, and after that you pay $1 per month — or $2 per month for a retirement account. Above that minimum amount, the fees switch to 0.25 percent of your annual portfolio balance.
Strategies: Stash suggests individual investments based on your investment budget, risk tolerances, goal, and time horizon.
This discount brokerage has come out with a robo-advisory that leverages the company’s low-to-no commissions on core ETFs.
Fees: The lowest tier service, Essential Portfolios, costs 0.3 percent annually; the next level up, Selective Portfolios, costs 0.75 percent; and the top tier service costs up to 0.9 percent.
Strategies: Essential Portfolios has five different portfolios; Selective Portfolios consists of a broader range of goal-oriented portfolios; while Personalized Portfolio, offers more tailored portfolio construction and advice.
Since this mutual fund giant issues some of most cost efficient ETFs in the industry, Vanguard is certainly well positioned to compete in the robo-advisory market.
Fees: Pay just 0.3 percent of the portfolio value annually.
Strategies: Vanguard has you talk to a human investment advisor to set up a strategy reflecting your goals and current financial situation. Then the robo part of the operation executes and manages the portfolio — allowing you to be as involved in it as you want.
This Canadian company wealth management solutions and a robo-advisory — details regarding the latter appear below.
Fees: The company explains its fees as $10 month if you invest $25,000.
Strategies: Choose one of the following types of ETF portfolios — safety, conservative, balanced, growth and aggressive.
This robo aims to reduce taxes, fees and risk — all in one offering.
Fees: Pay just a quarter of a percent of your portfolio value per year.
Strategies: The company has three categories of portfolio allocations, one of them for retirement and two others that are taxable. Within each of these categories there are 20 different portfolios that each have different amounts of risk and volatility.
The company says its approach aims to minimize volatility and maximize reward through diversification.
Fees: Pay just 0.4 percent annually with a balance of at least five digits — or if you have less than that, you pay 0.5 percent.
Strategies: The company currently offers you a choice of three strategies — conservative, balanced and growth.
The money-center bank unveiled a robo-advisor offering in November, made possible through a partnership with SigFig (another robo described elsewhere in this article).
Fees: Invest $10,000 to $25,000 and pay an annual fee of 0.5 percent. That fee drops to 0.4 percent if you have at least $25,000 in a Wells Fargo deposit account or at least $50,000 in combined banking, brokerage and credit accounts at the bank.
Strategies: The service has nine different portfolios that might be recommended based on your goals, time horizon and risk appetite. The choices include conservative income, moderate income, aggressive income, conservative growth and income, moderate growth and income, aggressive growth and income, conservative growth, moderate growth, and aggressive growth.
Robo-advisors are already cheap to begin with, but WiseBanyan takes it to a whole new level of cost effectiveness — it’s completely free for customers.
Fees: Yes, this robo-advisor says it charges no fees whatsoever.
Strategies: Suggested portfolios include ones for retirement, wealth building, saving for a rainy day and other goals — customizeable according to your time horizon and four different levels of risk tolerance.
How Can You Choose?
As you can see above, there are so many robo-advisors to choose from that, if anything, you might get decision fatigue from comparing that many.
One possible way to streamline the choice might be to go by which one has the lowest fees — in which case the ones that don’t charge anything at all might seem most attractive.
But before you rush into any of the free robos, make sure you read the company’s own explanation of how it works so you know its business model.
Online brokers that are technically free of charge to consumers might actually obtain income from third parties using a business model called payment for order flow.
Payment for order flow might sound inocuous at first, but it actually amounts to a massive opportunity cost: When brokers sell their order flow to third parties, those third parties can trade against you in a way that can interfere with your ability to obtain the best trade prices — you might miss the chance to buy at the absolute lowest price and sell at the very highest price.
Aside from that, you have a lot of tantalizing choices in the robo-advisory world: Most of them offer great opportunities to maximize your investment performance by saving money on fees.
Readers, are there any companies that weren’t included in this article that you think should be added? And have you looked into any robo-advisors and if so, which ones? Or if you haven’t checked any of this out yet, why not? Have you ever worked with a financial advisor — what kind of investing experience do you have, if any?
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