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Brian Hayslip

How do I choose the best portfolio option with a robo advisor?

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If you’ve never worked with a robo advisor before, the process may seem a bit confusing. Unlike other brokerage accounts, when you apply for an account with a robo advisor, you’ll be asked a number of questions about your age, income, other account balances, investment objectives, and risk tolerance. The robo advisor uses your answers to present you with a portfolio or group of portfolios that meshes with your financial goals. These pre-built portfolios form the basis of the robo advisor business model. They are created using the same technology that active fund managers and professional financial advisors use to develop custom portfolios typically containing ETFs. These pre-built portfolios are one of the reasons robo advisor management expenses are so low. Each robo advisor platform has a different number of proprietary portfolios; the exact portfolios and their composition are closely guarded secrets within the robo industry. Betterment, for example, has just over 100 standard portfolios. But your portfolio options don’t end there, since Betterment as well as many other robo advisors allow various customization options. Most new investors are best served by choosing from among the options recommended for you based on your questionnaire. The portfolios are driven by complex algorithms that take into account cost management, tax optimization, risk/return ratios, and other friction points so your money has the best chance of accomplishing your goals. If you don’t like the one presented, you can also change the answers to your questionnaire to see how it affects your recommended portfolio options. Finally, you can also have multiple portfolios within a single account. For example, you might have a long-term retirement portfolio as well as a shorter term portfolio designed to help you accomplish a goal such as buying a new house or paying for a wedding. Most robo platforms give you the option of either messaging or talking via phone with a financial advisor if you have questions about a portfolio recommendation or asset allocation. Some offer these services free of charge, others charge a small fee, so check before you make a call. You also have the option, if you’re not happy with your portfolio recommendation with one robo advisor, of opening an account with another to see how their recommendations stack up. There are many robo advisor options with no account minimum, so you can comparison shop before you decide where to put your money.

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