Robo-advisors have become tremendously popular over the last decade, and rightly so. They automate the investing process for you, making it simple to invest in a diversified portfolio of assets, and they charge much less than a typical financial advisor. So it’s little wonder that many investors have turned to them, and robo-advisors now manage hundreds of billions of dollars.
Here’s what a robo-advisor does and who the major players are, including a few hiding inside some of the big financial institutions you already know.
What a robo-advisor does
A robo-advisor is a digital platform that uses technology to put together a portfolio based on your investing goals and needs.
Robo-advisors basically use the same tools a human advisor would use. But a robo-advisor also does things that would be tedious, expensive or impossible for a human advisor to do.
Robo-advisors can:
If you have a long-term goal such as retirement, the robo-advisor will tend to pick aggressive investments such as stock funds, which have a track record of high returns. If you have a short-term goal, the robo would likely select more conservative investments, such as bond funds or even cash.
How do robo-advisors invest?
To invest your portfolio, a robo-advisor typically uses exchange-traded funds (ETFs) that have certain characteristics, such as what they’re invested in (stocks, bonds, cash or some mixture), or a certain level of volatility, including very little volatility at all.
ETFs charge an expense ratio, which is a fee paid to the fund management firm based on how much you have in the fund. A typical expense ratio might be 0.05 percent to 0.35 percent per year, or $5 to $35 for every $10,000 invested. You pay these fees no matter which robo-advisor you select, but some robos offer funds with lower fees, so check what they’re charging.
With a robo-advisor, clients simply deposit money into the account, and the robo-advisor invests it according to the investment plan that’s been laid out. The client can access the robo-advisor account at any point of the day to see the current market value of the account and how it’s invested.
How much does a robo-advisor cost?
Costs can vary with robo-advisors, but they are generally much less expensive than traditional financial advisors. Robo-advisors typically charge a percentage of the funds you have invested with them. That fee is often between 0.25 percent and 0.50 percent per year, or about $25 to $50 per $10,000 you have invested.
That’s a significant difference from the typical 1 percent charged by human advisors. Some robos charge more, but offer higher levels of service, such as access to a human advisor. Others charge no fee at all.
Biggest advantages of a robo-advisor
A robo-advisor really shines in a few key areas, especially automation, which gives it a real edge over human advisors. Robo-advisors can be very good at tedious or formulaic tasks, such as designing a portfolio based on your goals. (Human advisors excel at the more sophisticated and less-routine tasks — here’s how to decide which is better for you.)
- Value-added features: As mentioned above, robo-advisors stand out in features that would simply be too tedious for a human to handle, such as daily tax-loss harvesting. They also make rebalancing a portfolio easy, and they automate and simplify the process of investing a client’s money.
- Simplicity: Investing with a robo-advisor is tremendously easy, because clients can simply send in money, and the robo does the rest. Investors don’t need to do anything else, and they can always check on the account or even adjust it, if needed, when their financial situation changes, for example.
- Cost: Robo-advisors tend to be much cheaper than traditional financial advisors because everything is automated. Some even charge no fee at all.
Who should get a robo-advisor?
A robo-advisor can be a great choice for many different types of investors, but they can be especially helpful to:
- New investors who want help building and managing their portfolios. Answer a few questions to determine your goals and risk profile, and from there, you can check your portfolio a few times a year.
- Investors who don’t want to pay a human financial advisor’s fees but want a customized portfolio based on their needs.
- Investors who want a “set it and forget it” approach to investing.
How to open a robo-advisor account
It’s surprisingly easy to open an account with a robo-advisor, and since they’re all web-based, you can get going at any time of the day or night. Here are some basic steps you will need to take in order to open and set up an account.
- Gather your information. You’ll need some basic personal and financial information such as your Social Security number and bank account details. Once you have this, you can usually open the account in 15 minutes or less.
- Decide how much to deposit. You don’t even need money to get started with many robo-advisors, though some may require that you deposit a nominal $5 to get going. Others may require $100 or even $500 or more to start. However, if that’s a concern, you have options to avoid an upfront deposit.
- Set your investment plan. Once you’ve opened the account, the robo-advisor will use a questionnaire to gauge your risk tolerance and time horizon. From there, it will design a portfolio that meets your parameters using ETFs. The robo-advisor may ask other questions about your financial goals to further tailor your portfolio to your specific needs and situation.
Popular robo-advisors
Robo-advisors have grown a lot in the last decade, and many of the independent players — those that offer only robo-advisors — are the best known. However, other well-known financial players may also offer a robo-advisor as part of their total offering, so don’t assume the independent players such as Betterment and Wealthfront are the only game in town.
| Robo-advisor | Account minimum | Fees |
|---|---|---|
| Betterment | $0 | 0.25 percent annually or $4 a month |
| Vanguard Digital Advisor | $100 | 0.20 percent |
| Wealthfront | $500 | 0.25 percent |
| Schwab Intelligent Portfolios | $5,000 | None |
Betterment
Betterment is one of the larger independent players, and it requires no account minimum for the entry-level account, which charges a management fee of 0.25 percent a year or $4 a month depending on your balance and recurring deposits. If you’re looking for more access to certified financial planners, you can step up to Betterment Premium for a 0.65 percent fee, but you’ll need to plunk down at least $100,000 in the account.
Vanguard Digital Advisor
The top robo-advisor by assets under management is Vanguard, which is best known for its lineup of low-cost funds. Vanguard Digital Advisor takes just $100 to start investing, and you’ll pay an all-inclusive fee of about 0.20 percent, instead of separate management and fund fees. Depending on the portfolio and funds you select, your fee may be 0.25 percent or about 0.16 percent instead.
Wealthfront
Wealthfront requires a $500 account minimum and charges a 0.25 percent management fee. Wealthfront offers low expense ratios on its ETFs, no additional account fees and goal-based planning.
Schwab Intelligent Portfolios
You might hear “Charles Schwab” and think “discount broker,” but this financial powerhouse also runs the second-largest robo-advisor. While you’ll need more money than other robos to get started — a hefty $5,000 — you won’t pay any management fee. You can also upgrade to the Premium offering, which requires a $25,000 deposit, $300 start-up fee and $30 monthly fee. But you’ll also have unlimited one-on-one access to a certified financial planner.
Other larger financial players such as Merrill and Wells Fargo have entered the robo-advisor field as well.
Bottom line
While you might feel hesitant to trust your money to a computer app, robo-advisors are actually quite sophisticated. In fact, your traditional human advisor is likely using one to create and manage your portfolio anyway. Robo-advisors provide many attractive services for a reasonable cost, and their ease of use makes them particularly appealing to new investors looking to get started.
— Maurie Backman contributed to an update of this article.
Read the full article here
