Robo-advisors are gaining in popularity, with about 3.5 million people using them as of 2021 and 5 million people estimated to be using them by 2025. Robo-advisors work by using algorithms proprietary to each company. They can be great tools for the beginning investor since they respond to market fluctuations in real time with portfolio rebalancing and potential tax-harvesting, and often have lower fees and lower balance requirements than conventional (human) investment advisors.
However, robo-advisor platforms are not all created equal, so it’s essential to understand how each company works and pick one that meets your needs.
Rich & REGULAR with Kiersten and Julien Saunders is no longer releasing new episodes on the SUCCESS Podcast Network, but you can still listen to the full conversation below.
Keep reading for some features to consider as you research.
Determine your goals.
As with any investment strategy, it’s important to start by understanding your goals. Knowing what you’re saving for—whether it’s retirement, college education for your children, a down payment on a house or all three—can help you understand your risk tolerance, timeline and other factors required to invest successfully.
As you look at various robo-advisors, make sure you’re keeping your goals and targets in front of you to help ensure that you’re picking the best option for you.
As we discuss in this episode, when you sign up with a robo-advisor, you’ll generally answer a series of questionnaires to help the algorithm determine a portfolio based on your risk tolerance, timeline and preferences. It will make available portfolio recommendations based on those answers, though you should be able to override the algorithm’s choice if you need to.
Features to consider.
As you research, make sure you consider the features that are important to you. If you want to keep fees as low as possible, you may need a robo-advisor only, with no option to ask questions or get advice from a human advisor.
If you need a bit of help or want someone to help you understand what the market is doing, a hybrid option of robo-advisor and human financial planner may be your best bet. As you begin to look for the right company for you, consider the following:
Low fees: One of the primary benefits of a robo-advisor is the low fee structure that most of them place on your assets under management (AUM). While some traditional financial advisors charge upwards of 1% of your total AUM, robo-advisors tend to charge somewhere between .25% and .50%, depending on the company you choose, and some even offer free introductory or promotional rates and waived transaction fees.
It’s important to note that since robo-advisors usually build their portfolios using index funds or exchange-traded funds (ETFs), you will also be responsible for the fees charged by those accounts, in addition to the management fee charged by the advisor.
Minimum required investment: Traditional financial advisors often have a high account minimum, which can be a barrier to entry for those just starting with investing. Consider using one of the original robo-advisors like Betterment, which doesn’t require a minimum balance, or Wealthfront, which only requires a minimum balance of $500.
What kind of accounts are provided? Some robo-advisors offer only individual retirement accounts, while others can help you manage a trust or possibly even your 401(k). For example, Betterment offers brokerage (or taxable) accounts, individual or Roth retirement accounts, as well as trusts, SEP-IRAs and other joint taxable accounts.
If you’re new to investing and want to work with a fully automated robo-advisor, it may be helpful to schedule time with a financial planner who charges hourly to help you identify the accounts that will allow you to reach your goals most effectively.
Automated or hybrid account: The classic robo-advisors started in 2008 as strictly automated platforms without access to a human financial advisor. As more companies enter the market, options are available that allow you to use the robo-advisor algorithm and access a human advisor.
Be aware that costs, fees and account balances for these types of services are generally higher than the classic robo-advisor platforms, so it’s important to be mindful of the fee structure before creating an account.
Staff credentials: If you decide to go with a hybrid option, review the certificates or licenses that the traditional advisors are required to have, as well as what your extra fees provide.
Consider if advisors are available 24/7 to answer questions, or only during specific working hours, and if you can actually speak with someone via phone or video chat, versus using email or chatbot exclusively.
Robo-advisors are a great piece of technology, but working with a human advisor may be beneficial if you’re new to investing or have difficulty handling market fluctuations. Make sure to do your homework and choose the option that best fits your situation so that you know what you’re getting into before you start investing.