For newbie and hands-off investors, robo-advisors are one of the best ways to handle your investments. They’re enticing with low fees, friendly user interfaces, and minimal work on your part. If you’re exhausted about making investment decisions, let the robots take over.
If you’re just getting into investing and want to explore all your options, you’ll want to know what a robo-advisor is and if getting one is the right fit for you.
What Is a Robo-Advisor?
A robo-advisor is an automated investing software that uses your personal investing information to make investment decisions on your behalf. They’re great tools for beginners and advanced investors, and make investing decisions based on information you give like your age, when you want to retire and your risk tolerance.
“The first robo-advisor to hit the market was Betterment in the aftermath of the Great Recession,” says Riley Adams, a CPA, senior financial analyst at Google and owner of Young and the Invested. “The company pioneered the idea of asking their users questions and making investment portfolio decisions based on these answers and the goals they have.”
Over the last nearly 15 years, other companies have popped up or created robo-advisor branches to already existing firms. For instance, Fidelity has Fidelity Go, its robo-advisor offering alongside its traditional advisory platform. Betterment, Wealthfront, and Ellevest all began as robo-advisor-only firms.
How Robo-Advisors Work
When you sign up with a robo-advisor, they all start with some basic questions about you, like how old you are, your investment goals, and how much you can reasonably contribute to your account. Based on algorithms or mathematical rules and formulas, the tool determines an appropriate model for your investment portfolio based on your needs and preferences.
“A robo-advisor platform has an initial data gathering process where you answer questions related to your finances, risk tolerance, and timeframe,” says Cassandra Kirby, private wealth advisor at Braun-Bostich & Associates, a financial advisory firm.
Using software, the robo-advisor puts together your entire investment portfolio within a few minutes. You can do it without ever talking to another human. This is one of the most appealing parts.
“One of the best ways to outperform the stock market is through not making mistakes when everyone else does,” Adams says. “Often, emotion drives these mistakes. Robo-advisors don’t fall prey to emotions, instead relying on programmatic investment elections and asset allocations.”
Some people like the idea of working with a human to get tailored, specific financial advice. But it’s not required to get started or even have an ongoing relationship with your investments. A common barrier for newbie investors is removing the idea that you need to be an expert investor. In reality, you only need a few dollars (and minutes) to get started.
Our Favorite Robo-Advisors
According to a recent NextAdvisor survey with personal finance experts, Betterment was the clear favorite. But there are other great robo-advisor options available to investors. See a few of our favorites below.
Betterment is a crowd favorite when it comes to robo-advisors. Julien Saunders, co-creator of rich & REGULAR, a husband and wife-run online finance community, says he loves Betterment because of its flexibility. It gives investors the ability to select pre-created portfolios or build their own.
Fidelity offers its Fidelity Go, its automated investment advisor. It offers low fees, $0 to open an account and the service is free for balances $10,000 or lower.
Haley Sacks, founder of Mrs. Dow Jones, stands by Wealthfront as her favorite robo-advisor. She attributes it to its easy-to-use platform and financial planning tools. Her only gripe is there are no humans attached to the app. “Would love access to a financial planner,” she tells NextAdvisor.
New to its investing services, SoFi has no account minimum to get started and no management fees for automated investing accounts. It has different investment plans to choose from like retirement accounts or taxable accounts.
Ally requires $100 to get started investing with a robo-advisor. The company also has 24/7 customer support, and sets up your account based on your goals and risk tolerance.
Ellevest has no account minimums to get started, and offers three tiers of service, starting at just $1 a month. Investors though Ellevest have access to IRA accounts and personalized retirement planning through its $5 a month plan called Ellevest Plus.
Cost of a Robo-Advisor
Most robo-advisors charge either a fixed monthly fee or a percentage of assets under management (AUM), somewhere around 0.25% to 0.50%. Adams says your portfolio determines which fee would work best for you.
“If you plan to build a large portfolio in quick fashion, choosing a low-fixed fee might save you more over time,” he says.
Let’s take a look at what that looks like in real money. Ellevest charges $1 a month for its essential tier, which includes investing. If you open your account with $5, 20% of your cost is going to paying for the Ellevest platform. As you continue to add money, that percentage goes down. If you have $100,000 in your account, $1 is 0.001% of your assets under management — far less than some competitors.
Betterment charges 0.25% of your assets under management. For $1,000, that equates to about $2.50 a year. But for $100,000, that’s $250 a year.
These might seem like big numbers, but using a human financial advisor might cost you even more. Adams says most financial advisors charge anywhere from 0.50% to 1.5% or more of AUM. But you’re getting personalized attention, with someone building out an entire financial plan and managing your investments that are tailored just for you.
Besides robo-advisors, there still is an option of managing your investments yourself. Picking low-cost ETFs, target date funds, or mutual funds that track broad indexes are good options. Just be sure to pick funds with low expense ratios, or fees.
Some robo-advisors offer a hybrid option, letting you roll with a robo-advisor most of the time but offering financial advisors for when you want to talk to someone. Sometimes this is included in your fee, other times it’s an extra fee.
But all in all, these services make it easier to start planning for the future and get your financial goals in order.
For many newbie and novice investors, robo-advisors can be a great way to invest. With low fees and minimal management, you can get started with just a few dollars.
Is a Robo-Advisor Right for You?
Getting started with investing is already going to take some homework. To make sure you’re choosing the right type of advisor, ask yourself a few questions, like:
What are my needs?
If you don’t have a lot of assets, family, or even knowledge about investing but you know how beneficial it is to long-term financial growth, a robo-advisor should be enough. But the more money you have (and the more assets you own), the more you might need tailored financial advice. This way, someone can work with your specific situation to make sure your investments are working right for you.
What can I handle?
If you’re interested in learning the ins and outs of the stock market and hand-picking your stocks and other securities, you might want to look at discount brokers rather than robo-advisors. Brokers let you handle all the work yourself and the fees tend to be less compared to robo-advisors, depending on what you’re investing in.
What are my long-term investment plans?
The vast majority of people only use investment accounts to fund retirement. But that doesn’t mean that’s the only type of investment account out there. If you want to put money away for retirement, you can set it with a robo-advisor. If you need help with other financial things, like buying a home or getting a budget in order, you may want to think about talking to a financial advisor.
Can I talk to a human?
If you really don’t want to miss out on human interaction, it’s fine to explore personal financial advisors. But if you’re just jumping into investing, a financial advisor might not be beneficial and a robo-advisor is enough.