Finding the Best Robo-Advisors For Your Money
Recent predictions say that Social Security will run out of money around the year 2034. You can argue about the actual date all you want. However, it does confirm one thing: we all need to be investing and saving for retirement. If or when the program doesn’t have anything left in it, we will still be financial fit. The problem many people run into is the large fees and commissions that go along with investing money. It’s hard to save when a big chunk is taken off the top.
As technology improves, and as online access has permeated most countries around the world, investing has become easier. But those fees largely remain. Fortunately the last few years have ushered in a new method of investing. A method where you aren’t spending your time trying to calculate expense ratios, alpha returns, and trying to understand benchmarks. Instead, you let the robots do all the work for you.
What is a Robo-Advisor?
Robo-investing isn’t an entirely new concept. What is unique is that there are finally companies that have seen the niche where people want minimal attention and minimal fees. Here is briefly how it works:
You sign up to invest your money through XYZ Robo Traders. After completing your risk tolerance profile, you set up how much you want deposited automatically into your account. All trading, balancing, rebalancing, and reinvesting are done automatically. It’s that simple: little work on your part, let the software take care of the rest, you retire with a nice nest egg.
Of course that’s an over-simplified scenario. There’s a little more that goes into it. For example, do you want the most tax advantaged investment plan? Rebalancing at the right time can lead to some great tax-loss harvesting. The software has it all set up for you. Or maybe you want semi-robotic investing. But you still want to hop on and move money around as needed. That can be arranged too.
Most robo-advisors will make use of ETF’s, or Exchange Traded Funds. These funds are mutual funds that function similarly to a stock (that’s the short answer; see Investopedia for the long answer on what an ETF is). These popular funds are a way to keep expenses and commission low; often lower than index funds or un-managed mutual funds.
The bottom line is that you get into funds that are in line with your risk tolerance, but you don’t have to worry about the up-front commissions or the high ongoing fees often associated with a financial advisor.
What’s in it for You?
It sounds like a great deal, but it begs the question of why you would want to use a robo-advisor. Wouldn’t it be simpler to do it on your own, or hire a professional? There are some important key points as to why robo-investing is a smart choice for a large part of the population; it doesn’t all come down to how much the investment costs.
Being in Control – Financial advisors are supposed to have your best interest in mind. But often you get put into funds that are expensive (they pay the advisor a higher commission or fee), and they underperform. With a robo-advisor the software has no ulterior motive.
No Confusing Meetings – If you’ve ever sat down with a financial advisor, you have probably sat through a jargon filled meeting. In the end, you hope that you’re being taken care of. And then they call you every 6 months to set up follow-up meetings. Robo-investing lets you set it and let it do its thing.
Lower Costs – The bottom line is that software doesn’t need as high of a commission as a human. There are still fees, there will always be fees. But taking the human element out means you get to keep more of your money.
Convenience – It can all be done from your home. No trips downtown and fighting traffic after a long day of work.
Now this isn’t to say that robo-investing is for everyone. If you don’t feel comfortable with it, and you would rather have a more hands on approach, then the traditional methods will work well for you. For those that like the aspect of lower fees, would like to set-it-and-forget-it, and want to be taken care of, the best robo-advisors can provide tremendous value.
Which are the Best Robo-Advisors for you?
Just as you have choice in which bank to use, which insurance company to buy from, and which brand of soda you drink; you also get a choice when it comes to picking the best robo-advisor. This list is designed to put you in front of the best robo-advisors based on your needs, but keep in mind there are over 200 robo-advisors active in the US alone; this list is nowhere near exhaustive.
Lowest Cost Robo-Advisors
It should be said that along with any product or service, the lowest cost option may not be the best robo-advisor option. This isn’t to say that they provide an inferior product, or worse that they will defraud you, but it is to say that there may be fewer tools and options available. Also keep in mind that management fees are separate from internal fund expenses (if applicable).
Wise Banyan
Self described as “The World’s First Free Financial Advisor” the company itself goes on to say that investing should be a right, not a privilege. It only requires $1 to open an account, and when you don’t have any management fees hanging over your head, you know that your dollar will still be a dollar next year (until it’s invested of course). There are premium services offered for more flexibility and to tap into more tools and options; but for the fee wary investor, that 0% is pretty tempting.
Charles Schwab
A big name in the investment world that is attracting a cost conscious crowd. Charles Schwab is offering 0% fees on their accounts; no management fees, no service fees, and no commissions. You have access to a Schwab investment professional 24/7 (at no cost, and no limit on how many “meetings” you can have with them), and you can open an account with as little as $5,000. So how does the company make money? When you invest, you use Schwab ETF’s, these have a slightly higher than average operating expense (.17% compared to .12%). Still a great deal for those looking for low cost; especially when moving an existing account.
Read Charles Schwab Intelligent Portfolio Review
Best Robo-Advisors for Non-Qualified Accounts
It’s tempting to think that managing assets is the same across the board. But that’s not exactly true, especially if you have specific circumstances. Many people want to lower their taxable income as much as possible. One method is to sell securities at a loss. But that goes against the common idea that you should be maximizing gains. Robo-advisors that specialize in tax loss harvesting are the best for your non-qualified accounts.
Wealthfront
Low cost and tax loss harvesting. Wealthfront is a popular choice because it’s one of the oldest robo-investing companies out there, and it’s affordable. If you have less than $10,000 in your account, you don’t pay any fees. Anything above $10,000 is a flat .25%. What really separates them from most, however, is that you set your account up with individual stocks, index funds, or ETF’s. Incorporating a wider variety of options means that your taxable gains can more easily be minimized.
Personal Capital
When you have an established base. Personal Capital has an account minimum of $100,000; putting it out of reach for a lot of investors. Even those that do meet the minimums may find that the .89% advisory fee is a bit on the steep side. The reason is that it’s not entirely a robo-advisor account. Those added fees pay for a personal touch that helps to keep your tax loss harvesting on point. For clients over $200,000 a mix of individual stocks and ETF’s are available. Only clients with over $10 million get their lowest rate of .49%.
Read Our Personal Capital Review
Best Robo-Advisors for Qualified Accounts
Managing assets inside a qualified account is quite a bit different than in a non-qualified account. For instance, in a non-qualified account you pay taxes when the gains are realized (that means when you sell the security). In a qualified account, those taxes are paid when you withdraw the money (in a traditional account), or they have already been paid before the money goes in (in a Roth account). Either way, inside of a qualified account, securities can be bought and sold without worry about creating taxable events. Here are the best robo-advisors for managing your qualified money.
Betterment
When you want to go with the biggest. Betterment is the biggest robo-advisors out there; one reason is they take a holistic view of your finances instead of just a view of what you have under their management. You can link your other accounts, so that your Betterment account complements them instead of is “in addition to” them. There is no account minimum, and it’s just .25% for the basic account management fee (when you hit $100,000 you can get a premium account, but it will cost you more).
Fidelity Go
When you want a trusted name. Fidelity has been around since 1946. Since they already specialize in 401(k) and IRA’s, it’s really easy to roll your existing account into their Go account platform. To make it even more appealing, your account has a flat fee of .35%; there are no expense ratios on top of that. You even have access to their lineup of advisors and online tools that have been developed over the years. It is a $5,000 minimum to open an account, but a rollover should easily hit that mark.
Hybrid Robo-Advisor Accounts
Robo-investing is great for those that just need to set-it-and-forget-it. But what about those that need a little more personal touch? There are many investors out there that want to take advantage of the lower fees that robo-advisors offer, but they still want the comfort of knowing they can get in touch with a human advisor whenever they need to. These hybrid robo-advisor accounts are available, but many charge quite a bit extra, or they have higher account minimums.
Vanguard
When you need the extra touch. Vanguard Personal Advisor Services offer mostly robo-advisory services. They also offer unlimited access to a certified financial planner. Don’t confuse this with an investment advisor; the CFP has had more training. There are no extra fees to get help from the CFP, but there is one limiting factor for many people: you have to open your account with $50,000. When your account hits $500,000 you get a dedicated advisor rather than access to the team. If you have anything under $500,000 you might not get the same advisor twice. Expect fees of 0.30%.
Sign up for Vanguard Personal Advisor Services
Charles Schwab
The human touch on already low prices. Charles Schwab Intelligent Advisory is not the same as their other robo-advisor accounts (the ones offering 0% in fees). These accounts are essentially robo accounts that have human advice to go along with them. It’s a little easier to open a Charles Schwab account since you need half of the Vanguard minimum, or $25,000. Plus the slightly lower fees of .28% might entice many people to head to Schwab. 0.02% savings doesn’t sound like much, but as your net worth increases that little bit can add up. Charles Schwab also offers access to a CFP.
Alternatives to Robo-Advisors
Robo-investing has become incredibly popular over the past few years. They give you a managed account with fees that are lower than a traditional managed account (sometimes drastically lower). While each of the robo-advisors can manage all types of accounts, some are better at certain types than others. And then there is always the human element that you can tack on for an added fee.
They certainly have their place, but there are other alternatives. You can invest without outrageous fees.
Use a Commission Based Advisor – Many financial professionals don’t charge an annual fee. Instead, they opt for the commission based platform. They are paid a small percentage when the product is sold, and then they received ongoing trails for assets under management (generally less than .1%). For those that are commission adverse, you can do a direct-to-fund account into index funds and skip the vast majority of fees.
Using a Fee Based Advisor – Robo-advisor companies like to tout that fee based advisors cost 2% or more. This is often the extreme end of things. Many advisors discount their fees to less than 1%. The biggest issue, however, that you will run into is that the companies won’t allow discounting until the account is over $100,000 (often more).
Act as Your Own Robot Advisor – This isn’t all that different than what is already happening with the robo-investment accounts. Instead of a software program automatically rebalancing your portfolio, you hop on every 6 months and do it yourself. It’s actually easy to do for qualified accounts (non-qualified accounts are a little trickier because of taxes).
There are perks and limitations to each method. For most people, the small fee from the robo-advisor is worth the peace of mind.
The Rise of Robo-Advisors
So just how popular are robo-advisors? Are they really taking over the investment market? While “taking over” might be a stretch, they certainly are making an impact.
Currently robo-advisors are managing a significant number of assets. In fact, the largest company currently in the industry, Betterment LLC, manages about $8 billion. The projection for all robo-investment companies in the world: to manage 10% of the entire investment marketing by the year 2020. That’s about $8 trillion under management. Those numbers are propped up because the number of these companies joining the industry continues to be high; in 2013 there were 22 launches, in 2014 there were 37 launches, in 2015 there were 44. As that number tapers off, it’s likely to see the robo-investment industry slow down a bit.
Are you sick of high fees, but want a professionally managed account? Then try a robo-advisor.
