Robo-advisors have surged in popularity as people seek low-cost, automated investment opportunities. Within minutes, robo-advisors allow you to set up a customized, diverse portfolio and can give you access to wealth management services previously reserved for the ultra-wealthy, like tax-loss harvesting and access to a certified financial planner. For these reasons and more, robo-advisors are increasingly attracting attention from investors.
There's a growing selection of robo-advisors as new firms enter the market and veteran robo-advisors increase their offerings, so how do you filter through all the brokerages to find the best robo-advisor? In truth, the best robo-advisor will differ from investor to investor, dependent on their respective financial situation and needs. However, the top-rated robo-advisors share common features: a low initial investment, low fees, popular investment options and comprehensive portfolio management features. Below we provide five of the top robo-advisors for 2018 based on these characteristics. Note: this list is in alphabetical order. All data is as of December 2017.
Betterment LLC is one of the robo-advisor behemoths. It has over $10 billion in assets under management (AUM). Betterment takes a passive approach to investing and trades through the Apex Clearing Corporation, like its main competitor Wealthfront.
So why have so many investors chosen Betterment? The service may be particularly appealing to new investors as it has no minimum account balance for its digital, or standard, plan. It also offers top-tier portfolio management services through its Premium and Plus plans. Betterment employs automated tax-loss harvesting, and the company advertises that “You can potentially keep an additional 2.9% of your investor returns each year by using Betterment,” because of the brokerage's passive investing approach, rebalancing and tax-efficient techniques.
Betterment offers a mix of low-fee stock and bond index funds. Based on a risk questionnaire Betterment will provide you with a customized, diverse portfolio.
Betterment charges a 0.25% annual fee for its digital plan, which includes access to automated portfolio management, customer service and all of its web tools. This level of plan also gives customers access to one phone consultation per year with Betterment's experts. If a customer has over $2 million with Betterment, the customer does not pay a fee for the amount above $2 million. Betterment’s premium plans are pricier and have account minimums but offer clients unlimited calls with Betterment’s team of financial planners. The minimum account balance for the premium plans is $100,000, and the annual fee for premium plans are 0.40%. There are no additional transaction fees with Betterment except the low expense ratio fees charged by the fund companies. The ETF management fees range from 0.09% to 0.17%. The premium plan is made for folks who have a more complex financial situation and want to discuss their strategy with a CFP instead of messaging.
In addition to calls with financial advisors, Betterment offers retirement planning and a variety of account types such as IRA, 401(k) and trust accounts.
2. Personal Capital
Personal Capital is an all-in-one online financial platform that provides a suite of free financial planning tools, in addition to access to a human, financial advisor. It has over $5 billion in AUM. The robo-advisor allows clients to connect their existing banking accounts to the platform to track their spending and retirement savings and their portfolio's performance. The robo-advisor follows the modern portfolio theory investing approach to determine your portfolio’s optimal asset class mix and maximize your portfolio’s return. Its portfolios have a weighted income expense average of 0.09%. The brokerage also employs tax loss harvesting and rebalancing.
The fees for this robo-advisor are higher than others mentioned on this list, ranging from 0.49-0.89% annually. Most people will pay the highest fee, of 0.89%, as that is for holdings of up to $1 million. The more money invested, the lower the fee. While the company's fees are comparatively high, Personal Capital earns points for its wealth of financial planning tools and its dedicated team of financial advisors. Personal Capital offers three different accounts: its ‘investment service’ for those who have up to $200,000 in investable assets and two premium services: the ‘Wealth Management’ plan for those with $200,000-$1,000,000 in investable assets and ‘Private Client’ for those with more than $1,000,000 in investable assets. While all plans give clients access to a human advisor, the premium plans provide access to dedicated financial advisors and additional wealth management features such as tax-loss harvesting, and a suite of other services like estate and tax planning services.
3. Schwab Intelligent Portfolios
Schwab’s Intelligent Portfolios “zero fee” structure has attracted a lot of attention. Schwab charges no account fees or commissions. Rather, Intelligent Portfolios earns money from management fees from Schwab ETFs and select third-party ETFs. While Schwab’s accounts are “free,” a minimum balance of $5000 is required to open an account. It is worth noting this is the highest minimum requirement for all the robo-advisors included in this list
Schwab offers IRAs, 401k, 401(k) rollover, retirement and trust accounts. As with Betterment, you complete a risk-tolerance questionnaire when you start your account. The platform is goal-based and will construct a custom portfolio based on your responses to the questionnaires. Their ETF portfolio offers a wide variety of asset classes, and asset allocation is the basis of Schwab’s investment philosophy. Like Betterment and most top-tier robo-advisors, it employs automatic rebalancing and automatic tax loss harvesting for accounts with a value greater than $50,000.
According to Schwab’s website “The operating expenses you’ll pay on the ETFs on your portfolio are the same as the ones you’d pay if you invested in them on your own.” The expense ratios for Schwab’s ETFs range from 0.03% to 0.40% based on data from Strategic Insight Simfund. The operating expenses you’ll pay will differ depending on the makeup of your portfolio, especially since fundamentally weighted ETFs carry higher operating expense ratios.
SigFig is worth considering if you are already using an online brokerage because it manages your existing investments. With SigFig you keep your existing investments if you have holdings with TD Ameritrade Holding Corp., Charles Schwab Corp. or Fidelity Investments and the robo-advisor creates an “intelligent, tax-efficient, diversified portfolio.”
Similar to other robo-advisors, SigFig requires you to complete a risk-assessment questionnaire to customize your portfolio. The minimum account balance with SigFig is $2000 and accounts under $10,000 are managed for free. Accounts greater than $10,000 pay an account fee of 0.25%. However, you are only charged that fee for the amount in your account beyond $10,000.
SigFig offers two account types: its managed account and its free portfolio tracker account. If you manage your account yourself, then you can use SigFig’s platform to streamline tracking how your portfolio is performing using its handy dashboard tools.
Its managed account provides a suite of features such as access to phone calls with its financial advisors, asset allocation models, tax loss harvesting, automated rebalancing and automated reinvesting.
The robo-brokerage is steadily expanding its features and partnerships. In March 2017, Wells Fargo announced details on its new partnership with SigFig.
Wealthfront is another robo-advisor behemoth with over $7.5 billion in assets under management. The robo-advisor will build you a personalized, diverse portfolio based on your answers to a risk questionnaire. Your Wealthfront account is held at Apex Clearing Corporation (APEX), and Wealthfront makes investments on your behalf.
Wealthfront recently lowered its minimum investment amount to an affordable $500. Additionally, there are no management fees for accounts valued at less than $10,000. Once you hit $10,000, the Wealthfront platform fees are 0.25% of AUM. Similar to SigFig, the first $10,000 is always managed for free. Currently, Wealthfront offers a referral program that will give you and your referee an extra $5,000 to be managed with no management fees. There are no trading fees, and the underlying mutual fund fees average a low 0.12%.
Wealthfront offers a suite of portfolio management services and various account types (i.e. individual accounts, trust accounts, IRAs, 529 College Savings Plans). The firm employs a tax-optimized direct investing strategy for tax-loss harvesting and minimizing investing costs. Under this strategy, individual stocks representing an index are purchased instead of the actual index ETF, so that certain stocks may be sold for tax-loss harvesting. The firm also performs ‘daily tax-loss harvesting.' Finally, Wealthfront offers periodic rebalancing. Currently, this service is available to those with $100,000 or more invested with Wealthfront. The brokerage offers other additional features for those with $100,000 or more invested in an individual or joint investment account such as its new portfolio line of credit program (introduced in April 2017). In short, clients who meet the above-mentioned threshold automatically qualify for a loan worth up to 30% of their account balance. Wealthfront offers these loans at relatively attractive interest rates of 3.25%-4.5% and offers a flexible repayment program.
Cash deposited into the investment account associated with the loan is first applied to the loan's balance before being reinvested, but there's no fixed term for the loan.
Beyond the features mentioned above, Wealthfront offers several value-add features for accounts of all sizes. For example, its financial planning experience called Path. This financial planning feature is accessible from your dashboard. It analyzes your spending and savings patterns and provides recommendations based on your habits.
The Bottom Line
The best robo-advisor truly differs from investor to investor. Those who value having access to a live human in addition to automated investing may be best served by companies like Personal Capital. The young or frugal investor in search of low fees may be best served by robo-advisor offerings from their own already established discount brokerage relationships.