Before robo advisors, financial planning was left in the hands of the investment manager at your local bank or investment shop.
Then, in 2010, Betterment launched its investment platform becoming the industry’s first robo advisor, changing the financial planning and investing landscape forever.
Financial planning has been around for ages. It’s been an essential part of retirement planning and wealth management as long as people have been earning money.
Recently, a new wave of robo advisors has leveraged the power of technology to automate much of this process, leading to a new era of financial planning options for those seeking investment services and support.
Through their innovations, the robo advisor industry has flipped the traditional financial planning landscape on its head by providing investors with a faster and easier way to manage their money than ever before.
All at a cost lower than traditional financial planning services.
Up to 1 year free
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Betterment is a clear leader among robo-advisors with it low yearly fees and it's $0 account minimums
- No account minimum
- Low management fees
- Automatic rebalancing
- Less control over portfolio
- Limited ETF options
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Wealthfront is a force among robo-advisors, offering a competitive 0.25% management fee and one of the strongest tax-optimization services
- Tax loss harvesting
- Low management fees
- Free financial tools
- Limited control
- Limited investment options
0.49% - 0.89%/year
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Personal Capital is a hybrid robo advisor that offers human advisors as well as automated investing tools.
- High quality tools
- No hidden fees
- Easy to use interface
- High account minimum
- Not completely customizable
Today, we will take an in-depth look at robo advisors, reviewing what they are, how they are different, who they are right for, and more.
We’ll review the top 5 robo advisors in the industry right now and give you all the details you’ll need to get started with a robo advisor, or just learn a lot more about them.
Let’s dive in.
What is a Robo Advisor?
A robo advisor - at its most basic definition - is an online financial advisor that leverages technology to provide investment and money management services.While traditional financial advisors certainly use digital platforms and other online tools to deliver their services to the client, robo advisors take a tech-first approach, delivering everything via their proprietary online platform and mobile apps.
Automated Investment Portfolios
A robo advisor’s primary offering is its automated investment portfolio. The robo advisor will gather information about the client through an introductory survey - age, income, retirement status, etc. - and recommend an investment allocation based on these factors.
The allocations recommended are fairly standard based on age: higher stock allocations for those who are younger and higher bond allocations for those who are older.
After these allocations are set and an account is created, all you do is transfer money into the account and the robo advisor will automatically invest it across the targeted portfolio.
Most robo advisors follow the Nobel award-winning Modern Portfolio Theory (MPT) for their investment portfolio construction.
Modern Portfolio Theory was ground-breaking research that set the standard for many investment strategies that we see today.
At it's most basic level, MPT looked at risk versus reward to evaluate the maximum possible returns while maintaining an appropriate level of risk (not too much, not too little).
It established the Efficient Frontier that defines the optimal portfolio that offers the highest expected return for the lowest level of risk.
Low-Cost, Done-For-You Service
Another oft-touted feature of robo advisors is their low cost and done-for-you service. Robo advisors offer pricing structures that can be significantly below traditional costs.
Robo advisor services typically cost somewhere between 0.20% and 0.50% of your total investment depending on the provider and the services they offer. Human advisors average costs of 1% or higher for the same services.
Robo advisors are able to offer these low fees due to their leveraging of technology, use of low-cost index funds, and process automation.
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How is a Robo Advisor Different than a Financial Advisor?
Fundamentally, robo advisors and traditional human financial advisors are both working towards creating smart financial plans for their clients.
The primary difference between the two is their delivery.
Robo advisors deliver these through automation, limited human interaction, and their websites.
Human financial advisors are largely the opposite, requiring phone calls, in-person meetings, and consistent back and forth communication.
Human vs. Technology
Like I mentioned above, the fundamental difference between a robo advisor and financial advisor is the way in which they deliver plans and advice to their clients.
But there is more to it than just that.
A robo advisor is not absent from human interaction. Somebody had to create platforms and processes that define a robo advisor’s strategy and planning.
Behind robo advisors are investment and financial planning professionals who continually refine and research the strategies that the robo advisor uses.
The difference is that you wouldn’t normally talk to these people.
(Some robo advisors do offer human interaction as part of their platform. More on this later.)
Conversely, traditional financial advisors are not absent from technology. Many now leverage digital products to help clients review their financial plans through apps and websites similar to robo advisors.
The difference is that this comes after meeting the advisor in person or speaking with them on the phone.
It’s important to note that when you speak with a financial advisor, you are (should be) speaking to a licensed professional.
Financial advisors have to receive certain certifications in order to legally give investment advice. The most popular credential is the CFP, or Certified Financial Planner.
Professionals like this have a leg up on robo advisors in that they can provide more than just investment advice. They are also educated and experienced in providing overall wealth management.
This type of advice includes investment management, estate planning, tax advice, and retail banking services.
This type of service allows financial advisors to provide individualized plans for their clients.
Robo advisors, on the other hand, take a mass-market approach in which you are put into a pre-defined category based on your investment situation and then offered the plan of that category.
This isn’t to say those predefined categories are a bad thing. In fact, these categories provide the type of simplicity that may be perfect for investors without a significant amount of wealth and assets (approximately $2-3+ million net worth).
An additional note to these statements is that many robo advisors are now offering the extra human interaction that many investors seek.
This typically comes in the form of a one-time consulting calls or full access to a licensed CFP. I call this the hybrid advisor approach to investing.
Who are Robo Advisors Right For?
Robo advisors are not always the right fit, but for certain types of investors, they can be perfect.
For those who appreciate slick and easy-to-use websites and mobile apps, robo advisors offer the perfect combination of industry-leading digital platforms and investment services that are in no way less than that of their human counterparts.
Additionally, because of the technology-first approach of robo advisors, individuals can get completely set up in a few clicks on a website, making the process of setting up investment and other retirement accounts about as simple as it can be.
If you just want someone else to take care of it for you, robo advisors might be the perfect fit.
Their done-for-you services make investing easy. This is especially true for those without much or any investment experience or knowledge.
Handing off this responsibility to a robo advisor makes the process much simpler for you and ensures that your future retirement plans are in good hands.
Low-Cost and Long-Term Investors
Robo advisors take low-cost and long-term investing seriously. A primary reason that they are cheaper than financial advisors is because of the investment funds that they use.
Robo advisors promote the concept of passive index-investing through low-cost index funds. They put your money into industry-leading funds from companies such as Vanguard, Fidelity, and Charles Schwab.
Their low-cost approach can save an investor thousands - if not hundreds of thousands - of dollars over the life of a retirement portfolio.
How to Choose The Right Robo Advisor for You
When looking for a robo advisor, there are a few unique qualities and features you should look for.
These range from special tax strategies to retirement planning and simulations, among others.
Tax Loss Harvesting
Tax loss harvesting is the process by which you sell an investment that has experienced a loss. By realizing - or “harvesting” - you are able to offset investment gains and income when it comes time to file your taxes.
This special tax practice used to be reserved for high net worth individuals who could afford professional services or those with advanced investing knowledge.
Robo advisors brought this tax technique into the mainstream, saving investors thousands in taxes.
Many robo advisors now offer this as part of their normal services, and it’s a very neat feature to have.
Retirement Planning and Simulation
An additional feature to look for is retirement planning. Practically all robo advisors offer this now, making it an industry standard for both robo and financial advisors.
This feature will help you plan for retirement by looking at the current value of your portfolio, your current contributions, the way you are invested between stocks and bonds, and how much you expect to spend in retirement.
It will take all of this information and provide a projection or forecast of what your portfolio could look at and during retirement.
I touched on the concept of the hybrid advisor earlier in the article, but I wanted to highlight it here given it’s appeal to many investors.
A hybrid advisor is a robo advisor that also offers the services of a certified financial professional in addition to their normal slate of services.
These services can sometimes come at an extra cost, but it is still below the industry average for investment advisors and combines the best of both worlds.
If you like the idea of a robo advisor doing a lot of the work for you, but also want to be able to pick up the phone and speak to someone about your plan, then a hybrid advisor is a key feature you should look for.
Top 5 Best Robo Advisors
Let’s take a look at 5 of the most popular robo advisors right now. Not all robo advisors are made the same, and there are some key differences to pay attention to between them.
Primary differences range from the cost of the service to who the service is designed for.
Betterment was the original robo advisor and remains one of the top robo advisors to this day with over $16 billion in assets under management.
Their services include automatic tax loss harvesting, tax coordinated portfolios, retirement planning, socially responsible investing, custom asset allocations, and a premium hybrid advisor service that allows you to speak directly with CFPs about your financial plan.
Betterment has positioned itself as an industry leader and remains one of the most accessible robo advisors in the industry with no minimum investment, straightforward account setup, and an investment portfolio made up of the best index funds in the market.Best for: new investors and investors who want a hybrid approach
Wealthfront is another industry leader who consistently puts out new products that push the industry forward.
Among it’s best features include the ability to invest in precious metals and real estate, a new cash savings account with an industry-leading interest rate, and an automated financial planning software developed by PhDs called Path.
Wealthfront does not offer access to investment professionals, but they created the Path software to take care of that for you.
Path is free to use and takes into account everything from purchasing a home to your children's education to retirement savings.
Not one to be lacking in features Wealthfront also offers automatic tax loss harvesting and account rebalancing.Best for: investors who want precious metals and real estate in their portfolios
Personal Capital is unique in this line up in that it is two tools in one. The first is a free financial tracking tooling with the second being wealth management services.
Their free financial tracking tool is hands-down the best financial tracking tool in the industry today.
It tracks income, expenses, and all of your investments giving you a complete picture of your finances in a single place. Add in a top-notch retirement planner and you have the best free financial tool, period.
I cannot say enough good things about Personal Capital’s free financial tracking tool. Even if you do not use their wealth management services (which you are not required to), signing up for their financial tracking tool is a smart money move.
In addition to their financial planning tool, Personal Capital offers wealth management services to individuals with investable assets of $100,000 and greater.
They target clients who are further along in their careers and have a higher net worth than those just getting started.
Unique features include automated tax loss harvesting, access to certified financial professionals, and an investment fee analyzer calculates the total cost of your investments and shows you how much they will cost you over your lifetime.
Best for: higher net worth investors and those who want the industry’s best financial tracking tool
Ellevest is a robo advisor designed specifically for women. The founders of Ellevest recognized that the financial industry was tailored too much toward men and went out to change that.
They created the industry’s first for-women robo advisor that seeks to minimize the gender investing gap.
But they are much more than just a for-women business, they are a full-fledged robo advisor with services ranging from no minimum balance and a low fee of 0.25% to full-on wealth management with access to licensed CFPs.
Ellevest sends a smart reminder to women (and all investors) that getting started investing today can have a bigger impact on your financial future then receiving a 30% increase in pay.
The barriers to wealth for women are real. Ellevest is an industry leader in breaking them down.
Best for: women who want to get started investing today
Blooom takes a different approach than most robo advisors: they focus exclusively on your 401k or other workplace retirement accounts.
Instead of offering different investment portfolios or providing their own blended funds to invest your money in, Blooom focuses on making sure your 401k is as optimized as possible.
Blooom focuses on the 401k since it’s typically the biggest retirement account that people have. By optimizing the account, Blooom hopes to help people prepare for retirement with more confidence.
Bloom works like this: (1) you connect your 401k account, (2) Bloom analyzes it for diversification, fees, and allocation, and (3) for a fee they will make the right trades for you and provide continuous monitoring and rebalancing.
Their free version only allows steps 1 and 2, but they still provide their recommendations and leave you responsible to make the changes.
They support the following retirement accounts: 401k, 401a, 403b, 457 or TSP.Best for: People with a large workplace retirement account seeking advice on how to make sure it is set up properly.
Pros & Cons of Robo Advisors
Is a beginner’s guide ever complete without a pros and cons list? No, it isn’t. So here we go.
Robo advisors, on average, are cheaper than traditional financial advisors. High costs associated with investment and retirement plans are the sneakiest portfolio-killer in investing. Even a cost as low as 2% can decimate your portfolio.
Automated Investments and Rebalancing
This is the nature of the game for robo advisors: automation.
When you move money into a robo advisor account, the money is automatically invested and distributed across the defined portfolio.
Nothing else is required on your end. Additionally, when your portfolio gets out of balance due to the growth or decline of certain assets, most robo advisors will rebalance your portfolio automatically. This is another tasks taken off of your hands thanks to robo advisors.
Tax Loss Harvesting
Not all robo advisors have a tax loss harvesting feature, but many of the best do. Betterment estimates that investors who harvest investment losses (aka implement tax loss harvesting) can improve returns by 0.77%
And of course, this feature is automated. Meaning that losses can be harvested at the right time without you having to pay attention to them.
Keep in mind this feature is only useful in taxable investment accounts. Retirement accounts such as an IRA or 401k are not eligible due to their standard tax-preferred nature.
From retirement planners to expense tracking to socially responsible portfolios, robo advisors continue to improve their offerings to clients.
The robo advisor industry recognizes they need to offer more than just a slick interface to gain a client’s business and trust.
This includes many robo advisors now offering professional advice from CFPs, making them one step closer to providing full fledged financial advisory services.
Last but not least, robo advisors are inherently tech-forward companies that focus on delivering their platform in a way that is easy to understand and use.
No old looking or difficult to use websites around here - robo advisors make technology a priority and deliver.
A significant part of a robo advisor’s offer is automation and simplicity. By nature, this reduces the amount of control you have over your investments with them.
Robo advisors typically create portfolios that you are automatically invested in based on your preferences. If you don’t like a fund that is chosen, there isn’t anything you can do about it.
Fewer Investment Options
Along the same lines as less control, robo advisors offer less in the way of investment options than financial advisors.
With robo advisors, you will not be selecting individual stocks or asking for specialized funds - what you see is what you get from them and investment options are limited.
To be clear, limited does not mean bad. Robo advisor portfolios are constructed in a way to be the most efficient and cost-effective for their clients.
Robo advisors are not for the constant trader.
No Human Interaction
While some robo advisors are now offering consulting calls with licensed CFPs, others still do not have this feature.
If you want to be able to speak with someone about your financial situation, you’ll have to find a robo advisor that offers this service or stick to a financial advisor.
This is a pro and a con depending on who you are and how you like to go about your business.
Robo advisors require internet connections and basic computer and internet know-how. Everything is done via their websites and mobile apps.
While appealing to many, it can be a deterrent to others. Know which category you fall into before signing up with a robo advisor.
Which Robo Advisor Should You Pick?
This guide is jam packed with information about robo advisors. It has practically everything you need to know about them, what they offer, and how they are different than a traditional financial advisor.
Our Top 5 robo advisor list breaks down some of the biggest names in the industry, but you should always do your own research. Visit their websites and find out which one of them will work for you.
Make sure to consider their unique offerings like tax loss harvesting, retirement planning, or access to a licensed financial professional.
Features like this help the best stand out, so pay attention to them. They also provide a lot of benefit to investors like you and I.
How do you feel about trusting a robo advisor with your money?
A completely automated investing tools thats perfect for beginners and hands-off style investors they used advanced strategies to earn a higher investment return than you could on your own.
Jacob holds a bachelors degree in finance and has spent his professional career crunching numbers and mastering spreadsheets in the corporate world. He moonlights as a fantasy football commissioner, back-yard bbq amateur, and freelance writer/money blogger.