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. They can also 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, and other reasons, robo-advisors are increasingly attracting attention from investors.
As new firms enter the market and veteran robo-advisors increase their offerings, new robo-advisors continue to pop up. As an investor, how do you filter through all the brokerages to find the best one? In truth, the best robo-advisor will differ from investor to investor, depending 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.
Note that this list is in alphabetical order with data updated as of February 2019.
How Robo-Advisors Work
A robo-advisor is an investment platform that uses technology to help investors with their money. After you fill out your personal information, investment goals and risk tolerance, it will create a portfolio for you and manage it, making sure it stays on that trajectory over time. This is done through the use of algorithms. Many of these automated platforms will also rebalance your portfolio for you and use tax harvesting to lower your liability to the IRS.
Why Use a Robo-Advisor?
There are many reasons why investors may choose to use robo-advisors as opposed to a traditional portfolio manager or financial advisor including:
Low fees and no conflict of interest: Many robo-advisors charge significantly lower fees compared to traditional financial advisors. And because it's an automated service, there's no conflict of interest, unlike a human financial advisor who may be under pressure to sell a specific set of products.
Low minimum requirements: Most financial advisors require a minimum investment of $100,000 — a balance that may be unattainable upfront for many people. Robo-advisors have a much lower requirement, as low as $500.
Availability: Unlike most firms, robo-advisors are there for you when you need them. As long as you have an internet connection, you can get the help you need.
Robo-advisor behemoth Betterment LLC is best suited for new investors as it has no minimum account balance for its digital or standard plan. It had about $13.5 billion in assets under management (AUM) as of February 2019. Betterment takes a passive approach to investing and trades through the Apex Clearing Corporation — just like its main competitor Wealthfront.
It also offers top-tier portfolio management services through its Premium and Plus plans. Betterment employs automated tax-loss harvesting, and the company promises clients can keep "an additional 2.9% of your investor returns each year” because of its 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.
For its basic Digital plan, Betterment charges a 0.25% annual fee with no minimum balance, which includes access to automated portfolio management, customer service and all of its web tools. This plan also gives customers access to one phone consultation each year with Betterment's experts. If a customer has over $2 million invested through Betterment, the customer pays 0.15% per year for anything above $2 million.
Betterment’s Premium plans are pricier and have account minimums. But, they 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 is 0.40%. There are no additional transaction fees with Betterment except the low expense ratio fees charged by the fund companies. 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. For Premium accounts with over $2 million, the fee is .30% on the portion of your balance above $2 million.
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 a good choice for anyone who may want an automated experience with regular access to a financial advisor. This all-in-one online financial platform provides a suite of free financial planning tools as well as calls with its team of advisors. It had over $8.5 billion in AUM as of February 2019, with 19,000 clients across the U.S. The robo-advisor allows clients to connect their existing bank accounts to the platform to track their spending and retirement savings as well as 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 0.08%. The brokerage also employs tax loss harvesting and rebalancing.
The fees for this robo-advisor are higher than the others mentioned on this list, ranging from 0.49% to 0.89% annually. That means the company charges on a sliding scale. People who invest up to $1 million will pay the highest fee — 0.89%. Thus, the more money a client invests, the lower the fee. That means anyone who invests more than $10 million with the company will only pay 0.49% — the lowest fee on the scale.
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:
- Investment Service for those who have up to $200,000 in investable assets and two premium services
- Wealth Management plan for those with $200,000 to $1,000,000 in investable assets
- Private Client plan 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.
The company also offers a free Financial Tools app, which gives users access to services such as a retirement planner, an investment checkup and a budgeting plan.
3. Schwab Intelligent Portfolios
Charles Schwab’s Intelligent Portfolios is a good choice for investors who don't want to burdened with extra costs. Its “zero fee” structure has attracted a lot of attention, as it doesn't charge advisory fees, account fees or commissions. Rather, clients of the Intelligent Portfolios pay the operating expenses on the exchange-traded funds (ETFs) in their portfolios — the same as they would pay if they invested in ETFs on their own. Schwab earns money from other sources including management fees from Schwab ETFs and select third-party ETFs. While Schwab’s accounts are “free,” a minimum balance of $5,000 is required to open an account. 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, clients complete a risk-tolerance questionnaire when starting an 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 best suited for those who may already have some investment savvy. It 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, Charles Schwab 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 $2,000 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 the fee for the amount over the $10,000 threshold.
SigFig offers two account types: the managed account and 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.
The 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, which was founded in 2007, is steadily expanding its features and partnerships. SigFig is partnered with other brokerages including TD Ameritrade and Charles Schwab.
Wealthfront is great for investors who want to take a worry-free, hands-off approach to their investment strategy. It is another robo-advisor behemoth with over $10 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 with values of less than $10,000. Once you hit $10,000, the Wealthfront platform fees are 0.25% of your AUM. Similar to SigFig, the first $10,000 is always managed for free. Wealthfront currently 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 0.16%.
It offers a suite of portfolio management services and various account types such as individual accounts, trust accounts, IRAs and 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 certain stocks may be sold for tax-loss harvesting. The firm also performs daily tax-loss harvesting. Finally, Wealthfront offers periodic rebalancing. 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 which was introduced in April 2017. In short, clients who meet the $100,000 threshold automatically qualify for a loan worth up to 30% of their account balance. Wealthfront offers these loans at relatively attractive interest rates of 4.75% to 6.00% 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 established discount brokerage with a relationship in place.