A Look at the Top Robo-Advisor Services
Learn How Robo-Advisors Work and How to Find the Best One for You
Robo-Advisors are a relatively new invention in the investing world and they have gained in popularity in recent years. But are robo-advisors a good investment solution for you and your financial goals?
To find out if robo-advisors are smart investing tools for you and your portfolio, we'll take a look at how they work, how they can benefit investors, the fees they charge, and we'll take a look at the top robo-advisors on the market today.
What Is a Robo Advisor and What Do They Do?
A robo-advisor is, like the name suggests, a form of automated investment management service that requires little to no human interaction once the client makes the initial contact.
Sometimes called digital financial advice, robo-advisors are executed by software that utilize mathematical rules or algorithms to calculate asset allocation and investment selection for the client.
To arrive at the appropriate asset allocation and specific investment recommendations, the client will typically complete a risk tolerance questionnaire or similar form that requires the client to answer questions about their personal financial goals and tolerance for risk.
The investment type most often used with robo-advisory services is Exchange-Trade Funds, known as ETFs in the investment community, although other investment security types, such as stocks, bonds, mutual funds, futures, and real estate may be used.
After the initial investments are selected and allocated, the robo-advisor software will make periodic adjustments over time, similar to the rebalancing process that advisors and investors do manually.
What Are the Benefits of Robo-Advisors?
The benefits of robo-advisors can be summed up in one word — automation.
Whenever possible, automating one's finances is almost always a smart financial move. Examples of automation in personal finance include automatic deposits from payroll, systematic investment plans, and automatic rebalancing (most common with retirement accounts, such as 401(k)s).
The automation aspect of robo-advisors is also a benefit in a behavioral way. Often the biggest enemy of an investor is themselves — making mistakes by chasing after returns and selling at the wrong time. When everything is automated, including the asset allocation and investment selection provided by robo-advisors, the human element is removed and thus the long-term returns can be improved by simply separating emotion from money, which is almost always a good idea.
Which Are the Top Robo-Advisors?
Robo-advisors have been around since 2008, which is not old in the investment world, but there are already hundreds of services. While each variation of robo-advisor is similar, there are some subtle differences, including fees.
Here are some of the top robo-advisor services available on the market today, including the basics of operation and their fees:
- Vanguard Personal Advisor Services: Vanguard's robo-advisor model is the largest in terms of investor assets, which indicates it's model may be the most appealing to the investor community. While much of the service is automated like the first robo-advisors launched a decade ago, Vanguard adds a human element by adding a personal advisor to the mix. For a minimum account balance of $50,000 and an additional fee of 0.30 percent, investors get the automation of robo-advisors plus a human advisor to contact with questions above and beyond the capacity of a non-human "advisor."
- Schwab Intelligent Portfolios: Perhaps the best known robo-advisor service, Schwab Intelligent Portfolios' management service is built on three key components: The first is initiated by the client investor's completion of a questionnaire that assesses the investor's risk tolerance and their investment time horizon. The second is the construction of a portfolio of ETFs by Schwab. The third component is daily monitoring and rebalancing when necessary. There is a $5,000 initial investment minimum and $0 fees. However ETFs do have underlying expense ratios. Therefore the cost to the investor is limited to the ETF expenses.
- Betterment: Being third in assets under management for a robo-advisor service is an amazing feat for a company without the name recognition of a Vanguard or Schwab. A pioneer in the robo-advisor industry, Betterment offers a service that can be considered a blend of Vanguard and Schwab. Betterment charges 0.25 percent but has no minimum initial investment amount. If investors prefer access to a human advisor in addition to the automated service, investors can do so with Betterment Plus and Betterment Premium. The Plus service charges 0.40 percent per year and investors get unlimited emails and one personal call per year. For 0.50 percent, investors can get the Premium service for unlimited emails and unlimited calls per year.
Probably the greatest advantage of an online, automated investment service that investors can get with robo-advisors is that the removal of the human element also removes the potential of portfolio-wrecking decisions that both investors and advisors can make when overcome with damaging emotions like fear and greed.
Plenty of research and statistics show that average annual returns of portfolios are reduced by poor human judgment, such as selling in a panic or buying to chase higher returns. That's not considering other common investing mistakes, such as holding too many income-based investments in a taxable account or paying expenses that are too high.
So, the question of whether or not investors need robo-advisors is a highly subjective one. It's not much different than asking if you can do it yourself or hire a human advisor. If you are able to adhere to the simple rules of asset allocation, use index funds, automate finances where possible, use only term insurance, keep debt under control, and you won't cross over $2 million in assets any time soon, you can certainly manage your own finances.
The old adage, "The only person you can trust is you," is wise. However, choosing an advisor is something that only you can do for yourself. Therefore, if you trust yourself, you can choose an advisor for yourself, whether that advisor is you or another person.
Investors that are capable of finding low-cost funds, diversifying assets, and avoiding errors made by human emotion can do well to invest on their own without the help of an advisor — human or not.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.