How to Evaluate a Robo-Advisor

Automated online investment advisors, or robo-advisors, have gained popularity in recent years. This technology has upended the financial planning and wealth management industries. If you're comfortable with automated investing and don't have sophisticated needs, you might be interested in choosing one.

But how do you evaluate and decide which robo-advisor to use? Here are some tips that can help you decide.

Key Takeaways

  • First, take a look at the services provided. Many robo-advisers now have standard tax-loss harvesting and automatic rebalancing at no additional cost.
  • Second, compare the expenses you'll incur at each robo-advisor .
  • Finally, evaluate the costs and fees charged by the robo-advisors you are interested in and weigh those against traditional advisors.
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Identify Robo-Advisor Services

The first step is to determine what type(s) of financial advice and services you need. Most robo-advisors manage your portfolio; some firms have added the benefits of budgeting and financial planning and may provide access to an expert for assistance.

Basic Services

For the most part, portfolio management and asset allocation are the staple services that robo-advisors provide. They do it via the use of an algorithm that is based on Modern Portfolio Theory, generally using exchange-traded funds (ETFs).

Some firms such as Folio Investing and M1 Finance offer pre-built portfolios of stocks or ETFs that clients can buy with a click. Others walk clients through a goal-setting process and recommend a portfolio that fits their timeline and risk preferences.

Addtional Services

Above this basic level of service, several robo-advisors offer tax-loss harvesting services for portfolios that are not tax-advantaged in some way, such as an IRA. Many now include tax optimization strategies, but keep in mind that tax-loss harvesting is not always beneficial—it all depends on your tax situation.

Some robo-advisors that offer tax-loss harvesting will only do so if you opt-in, so be sure to read the documentation carefully.

You may find robo-advisors with specialties. For example, Blooom optimizes 401(k) investments and Personal Capital, which offers the ability to manage all of your accounts on a consolidated basis, is aimed at a slightly more upscale market.

You can find robo-advisors joining in on emerging and growing tech as well. For instance, Betterment, the first robo-advisor, offers cryptocurrency portfolios to clients.

Compare Robo-Advisor Expenses

Each broker will have a fee schedule for their digital advisors. Fees generally range from 0.15% to 0.50% of the assets under management. In addition, some advisors charge a one-time setup fee.

Personal Capital's fees range from 0.49% to 0.89% of the amount invested. Acorns charges $3 every month, while Betterment and Wealthfront, along with several others, have a simple 0.25% annual fee based on the dollar amount of assets you have under management.

Don't forget the expense ratios and transaction costs of the underlying exchange-traded funds or mutual funds. Unless the broker has other agreements or arrangements, they will still apply.

Compare Robo-Advisors and Traditional Services

Robo-advisors began with the idea that minimal human involvement could lower costs with the ability to set-it-and-forget-it, letting the algorithms run the show. However, there may be times when you'd like to talk to a professional.

Betterment was the first robo-advisor to bring in actual financial advisors to help field questions and give investors peace of mind. Several other robo-advisors have followed suit; many assign users a personalized advisor.

If you choose to involve a human advisor, it's essential to remember that they need to be paid. The brokerages with robo-advisors which employ human advisors may charge higher investment management fees or a one-time fee for a consultation.

Human financial advisors are there to answer questions, field general financial advice, help present options, or reassure you if the markets are getting you down.

Popular Robo-Advisors

Robo-advisor popularity has not been lost on major players in the financial services industry. Established firms in the self-directed trading industry have launched robo-advisors to appeal to clients who want to set aside some of their assets to be managed passively. These robo-advisors are part of a more extensive offering that includes banking and self-directed brokerage services:

These companies have the money to invest and the time to allow these services to grow. Additionally, if your needs change or you decide you'd like a more personal touch, you can transition to other services these firms offer.

Article Sources
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  1. Folio Investing. "Ready-to-Go Folios: Low Volatility Folios." Accessed Feb. 18, 2022.

  2. M1 Finance. "Create My M1 Portfolio." Accessed Feb. 18, 2022.

  3. Blooom. "Meet Blooom." Accessed Feb. 18, 2022.

  4. Personal Capital. "Wealth Management." Feb. 18, 2022.

  5. Betterment. "Crypto Is Coming." Feb. 18, 2022.

  6. Acorns. "Our Pricing Options." Accessed Feb. 18, 2022.

  7. Wealthfront. "Fees for Investment Accounts." Accessed Feb. 18, 2022.

  8. Betterment. "Plans for Every Investor." Accessed Feb. 18, 2022.

  9. Betterment. "The History of Betterment: Changing an Industry." Accessed Feb. 18, 2022.

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