Robo-Investment Advisors For Beginners

We’ve had automated teller machines for decades, and automated self-checkout kiosks for years. So it’s not too surprising that one more person who handles your money is now being replaced by an automated robo-version: The financial advisor.

Robo-advisors have become ubiquitous in the financial marketplace, and it’s not hard to understand why. Just as an automated checkout can tally the prices of your groceries and present you with a bill, a robo-advisor can add up all the information you give it and present you with investment recommendations. Investors have been using computers to make automated investment decisions for years, so having robo-advisors available to everyone is a logical next step.

And robo-advisors have quickly become popular, whether for ease of use, or because robo-advisor fees are much lower on average than regular advisor fees. Financial Advisors average anywhere between a 1%-2% fee, while most robo-advisors have a fee from 0.25%-0.50%.

That being said, all robo-advisors are certainly not created equal. Dozens of robo investment advisor options already exist today, and you can expect even more by the end of the year. Choosing between them can be a daunting task, so here are a few factors to keep in mind when trying to compare options:

• Minimum Balance: While some robo-advisors like Betterment allow balances as low as $1, others like Vanguard can require $50,000 or even $100,000 just to open an account.
• Fees: While robo-advisors do tend to have lower fees than traditional financial advisors, management fees can still range from 0.0% at SoFi, up to 0.9% at Personal Capital. And that doesn’t always include expense ratios, which are the fees charged by mutual funds. If your robo-advisor has a 0.75% management fee and uses funds with a 0.75% expense ratio, that means a 5% return is really only going to be worth 3.5% for you.
• Available Accounts: Some robo-advisors like Blooom only handle retirement accounts like 401ks, while others only handle taxable accounts. You should also pay attention to the range of fund options.
• Services: Some robo-advisors like Wealthfront offer services like rebalancing to maintain your portfolio allocation even after gains in one sector. If you're managing a taxable account, services like tax optimization and tax-loss harvesting can save you a lot of money on taxes by selling investments that have lost money to offset capital gains.
• Humans: Can you talk to a real person if you have questions? Robo-advisors like Betterment and Vanguard offer human-assisted advising, but this tends to cost more than purely automated services like Wealthfront. For some people it's worth it.

Which robo-advisor is best for you may depend on what’s the most important for you. If you just want something with a low minimum balance that will still offer portfolio rebalancing and tax loss harvesting, your best bets are either Betterment or Wealthfront.

If you have at least $50,000 to invest and are looking for the most sophisticated portfolio mixes with a robust set of investment management options, Vanguard or Personal Capital is probably a better choice for you.

Since your financial advisor may use computer algorithms to determine how to invest your money anyway, you may as well eliminate the middleman with a robo-advisor and save on management fees. At the very least, it’s worth considering.

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