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How do I choose a robo-advisor?

Mark Brewster


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The robo-advisor industry has come a long way since Betterment entered the scene in 2008. As the oldest robo, it’s not surprising that Betterment’s the largest free-standing robo-advisor in terms of assets under management ($14 billion), with Wealthfront a close second at $10 billion. The legacy firms are also fighting for a piece of the robo-pie. Charles Schwab’s no-fee Intelligent Portfolio robo manages over $33 billion, but the king of all is Vanguard’s hybrid Personal Advisor Services with over $112 billion in AUM. While investors vote with their money, AUM shouldn’t be the only—let alone defining—criterion in selecting the best robo-advisor for you. If you’re considering automated investment services, here are the factors to keep in mind when choosing a robo-advisor.

Management fees

As you’d imagine, these vary widely. Some, such as WiseBanyan and Charles Schwab Intelligent Portfolios, charge nothing to manage your money, but it’s more common to see fees in the neighborhood of 0.25% to 0.50%, or $25 to $50 per $10,000 invested. Keep in mind, though, that you may pay more than management fees when you use a robo-advisor. Most robos build ETF-based portfolios, and there may be transaction fees associated with ETF trades. Many robos waive these, however, or choose no-commission funds. And don’t forget you’ll also pay the expense ratio for any funds in your portfolio, so keep an eye on those, as well. ETFs tend to be some of the lowest passively managed investments around, but there’s still a lot of difference in long-term returns between a fund that charges 0.10% versus one that charges 0.04%.

Extra services and goodies

Tax-loss harvesting for taxable accounts and automatic portfolio rebalancing are pretty much standard with all robo-advisors, but there are other services that may be to your advantage. For example, Betterment offers fractional shares, so you don’t have to wait until you can buy a whole share in order to put your money to work. This is a nice extra if you’re on an automatic investment plan—every penny is invested right away. Wealthfront offers stock-level tax-loss harvesting for accounts that meet minimum balance requirements, which can significantly boost gains. Wealthsimple offers socially responsible portfolios so you can invest your values. These are just a few ways robo-advisors use extra services to differentiate themselves.

Account minimums

If you’re a brand-new investor, a robo with no account minimum might be the incentive you need to start saving money. On the other hand, if you’ve already got a stockpile of cash, you may be able to get into the top-rated legacies such as Vanguard ($50,000), Charles Schwab ($25,000), or Merrill Edge Guided Investing ($5,000). Most robos have low to no minimum investments, so it’s easy to get started without a lot of cash.

Investment choices

Nearly all robos build portfolios around passively managed ETFs and index funds, which are solid, low-cost options for getting broad exposure to the market. However, there are definite disadvantages in limiting your portfolio to a single asset class. Some robo-advisors include actively managed funds, individual equities, and bonds in their portfolios, while others offer asset classes you’ll rarely find in an automated service. Building Benjamins, for example, adds crypto, real estate, timberland, alternative lending, and reinsurance, among other unusual assets, to their portfolios.

Human touch and hybrid products

Some people are comfortable with hands-off digital investing, others want to know there’s a person at the end of the phone who can answer their questions and give them personal advice. Although the robo-advisor model is built around automated investment management, as the industry has evolved, more are offering access to a human financial advisor. If this is something you know you’ll want, look for a robo-advisor that makes it affordable for you to get the amount of advice you need. Betterment offers flat-fee “advice packages” built around common life events. The Marriage Planning package, for example, includes two 45-minute phone conferences with a professional advisor, the first to set up a plan, and the second six months later to monitor progress and make adjustments. Vanguard matches all its robo-advisor clients with a human financial advisor who develops a comprehensive financial plan and reviews and rebalances the portfolio to make sure it’s achieving the client’s goals. The advisor is also available by phone to provide personalized advice. Once you’ve decided to go robo, the next step is prioritizing the features and services that matter most to you. From there, it’s pretty simple to choose the one that best meets your needs.
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