Evaluating a Robo-Advisor

The advent of robo-advisors, automated online investment advisors that have gained popularity in recent years, has upended the financial planning and wealth management worlds. If you're comfortable with counsel that's primarily dispensed digitally, then this course might be a good one for your needs.

But how do you evaluate and decide which robo-advisor to use?

Key Takeaways

  • With so many robo-advisors now available and competing with one another, what should you look for in choosing the one best for you?
  • 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, determine the amount of human intervention or contact that you prefer. Do you want to automate everything or do you like to have somebody to talk to on a regular basis?
  • Finally, evaluate the costs and fees charged by the robo-advisors you are interested and weigh those against the added features and benefits that you may prefer.

Identifying Robo-Advisor Services

The first step is to determine what type(s) of financial advice and services you need. Most robo-advisors manage your money in one form or another. LearnVest is an exception: Their focus is on budgeting and financial planning, providing access to live help via the phone. While they make investment recommendations, they do not actually invest your funds.

For the most part, though, portfolio management and asset allocation are the staple services that robo-advisors provide. They do it via the use of an algorithm of some sort. Their investment vehicle of choice is usually exchange-traded funds (ETFs). Folio Investing offers a number of pre-set portfolios of stocks or ETFs that clients can buy as is. Similarly, Motif Investing offers pre-done portfolios of 30 stocks for one price.

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

Some robo-advisors further specialize: For example, Rebalance IRA focuses on retirement accounts and Blooom optimizes 401(k) investments. Personal Capital, which offers the ability to manage all of your accounts on a consolidated basis, is aimed at a slightly more upscale market; to partake of its management services, investors need a minimum of $100,000.

How Much Will it Cost?

Just as there are variations in the services offered, there are variations in the fees charged. They generally range from 0.15% to 0.50% of the assets under management. Some advisors charge a one-time setup fee as well.

LearnVest's fees range from $89 to $399 for their initial review and then $19 per month after that. Personal Capital's fees range from 0.49% to 0.89% of the amount invested. Acorns charges $1 every month, while Betterment and Wealthfront, along with several others, charge a simple 0.25% annual fee based on assets under management.

Remember that the expense ratios of the underlying ETFs or mutual funds the robo-advisors are investing in will apply as well. There might also be transaction costs for trading various investments.

Can I Talk to a Person?

Robo-advisors began with the idea that minimal human involvement could lower costs and people could just set-it-and-forget-it, letting the algorithms run the show. However, people still like to talk to a professional from time to time. Betterment was the first robo-advisor to bring in actual financial advisors to help field questions and give investors peace of mind. Now, several other robo-advisors have followed suit and many will even assign users a personalized advisor. Keep in mind that those professionals need to be paid, and so the robo-advisors that have financial advisors on staff may charge higher investment management fees.

Also, it should be noted that the financial advisors at many of these platforms do not have the ability to make direct investment changes or recommendations. Instead, they are there to answer questions, field general financial advice, and keep users' emotions in check.

Robo-Advisors vs. Traditional Financial Services Firms

The popularity of robo-advisors has not been lost on major players in the financial services industry. Fidelity Investments has forged an arrangement with Betterment, one of the oldest (founded in 2008) robo-advisors; the human advisors on Fidelity's team can offer a version of Betterment's professional Registered Investment Advisor platform to their clients. Fidelity has inked a deal with LearnVest as well.

Vanguard has its own version of a low-cost robo-advisor, as does Charles Schwab Corp. Schwab Intelligent Portfolios raised a stir when it launched its no-fee service in 2017. Schwab plans to make money on the assets under management ($5,000 is the minimum portfolio size).

When considering a robo-advisor, affiliations with major firms like Fidelity, Vanguard, or Schwab might be something to consider. These companies have the money to invest and the time to allow these services to grow. Additionally, as your needs change or if you desire a more personal touch, you will be positioned to transition seamlessly to other services offered by these firms.

The Bottom Line

If you've opted to go with a robo-advisor, you still have to consider which one best fits your needs as an investor. Factors to consider are the types of advice and service the roboadvisor offers, the level (if any) of human interaction offered, the minimum investment required, and any fees or expenses that you will incur. The increasing interest of major financial services firms in this arena is a further consideration.