What is the Best Robo Advisor?
What is actually the best robo advisor for you? If you’re not a financial expert, just choosing the robo advisor that best suits your needs can be a daunting task.
This is why we built an in-depth robo advisor comparison tool to help you quickly choose the robo advisor that meets your needs. It's as easy as entering a few simple pieces of information, and we’ll sort through the top robo advisors to let you know which one is best for you.
The two most innovative players in the space are currently Betterment and Wealthfront, each with approximately $3 billion USD worth of assets under management. You can see how they fare head to head on our Betterment vs Wealthfront comparison page.
I have $in a account to invest and want the following:
Minimum Initial Deposit
Assets Under Management
Roth IRA Accounts
SEP IRA Accounts
529 Plan Accounts
|$0||2007||$2.6 Billion||1||Sign Up|
|$2,000||2011||$70 Million||Sign Up|
|$500||2008||$2.61 Billion||2||Sign Up|
|$25,000||2011||$1.52 Billion||3||Sign Up|
|$50,000||2013||$101 Million||Sign Up|
|$75,000||2011||$245 Million||Sign Up|
|$10||2009||$35.4 Million||Sign Up|
|$500||2014||$8.3 Million||Sign Up|
|$3,000||2010||$232 Million||Sign Up|
- Betterment provides a free human advisor for accounts over $500,000
- Wealthfront enables direct indexing for accounts with a minimum of $100,000
- Personal Capital provides direct access to a Certified Financial Planner for accounts with a minimum of $1,000,000
- Charles Schwab Intelligent Portfolio enables tax loss harvesting for accounts over $50,000
How To Choose The Right Robo Advisor
Below are some of the factors you want to consider when deciding on a robo advisor:
Most robo advisors charge a percentage fee based on the size of the portfolio. These fees are typically much lower than the average 1% charged by traditional financial advisors.
Other robo advisors offer human advisors alongside their online tools and automated backend and some may charge an additional fee for consulting with human financial advisors.
It’s important to keep in mind that the upfront fees charged by robo advisors aren’t the only costs in your portfolio. There are also the fees embedded in the underlying investments - typically the management fees of mutual funds and exchange traded funds (ETFs). In most cases though, these are the same costs of low-fee funds you’d be paying if you were managing your own portfolio.
Some robo advisors like Charles Schwab’s Intelligent Portfolios include other hidden costs like large mandatory cash allocations that pay only a small percentage of the actual revenue the robo advisor earns on those funds.
A robo advisor that is missing features that could benefit your situation (e.g. the lack of tax-loss harvesting when you hold funds in a taxable account) can be an additional hidden cost of your robo advisor selection.
Minimum Initial Deposit
This is the minimum amount required by the robo advisor to open and maintain an account.
Single Stock Diversification
This feature helps employees and investors who hold a high percentage of their networth in a single stock (typically the same company that signs their checks) diversify in a tax-efficient, commission-free manner. Single stock diversification typically involves using dollar cost averaging to minimize volatility.
As the name suggests, direct indexing allows you to directly purchase and own all of the individual securities of a major index as opposed to owning a mutual fund or ETF that tracks an index. Some research has suggested that direct indexing may be more tax-efficient than owning the equivalent index funds/ETFs by allowing investors to harvest tax losses on an index’s individual component stocks.
Direct indexing also eliminates the management fees of index funds or ETFs, which prevents exact replication of the performance of an index investment. However, the actual calculation of fee savings must also take into consideration of the robo advisors fees.
Tax Loss Harvesting
The actual financial modeling and execution of tax loss harvesting can be extremely complicated, but the basic concept is simple - tax loss harvesting involves selling securities that have experienced a capital loss and replacing it with a similar one, in order to help offset taxes on capital gains and income.
Tax loss harvesting can reduce ordinary taxable income by up to $3,000 per year, though the actual increase in investment returns will depend on the amount of tax loss harvesting opportunities available through a year, the investor’s tax bracket, and many other factors - including the effectiveness of the robo - advisor’s tax loss harvesting algorithm.
Automated tax loss harvesting is one of the big ways that robo advisors can increase return for investors without increasing risk. However, tax loss harvesting doesn’t benefit everyone. Investors using only tax sheltered accounts won’t see a benefit from tax loss harvesting. Investors in a 0% capital gains tax rate, and even some investors in the 10-15% ordinary income tax brackets might not want to use tax loss harvesting. Investors in higher tax brackets investing in taxable accounts will see the most benefit from tax loss harvesting.
Not every entry in the robo advisor category is completely automated. Some are 100% automated, while others combine an online interface and backend automation with personalized advice.
There are many ways to categorize online financial services, but to us, if an automated online advisor service provides automated rebalancing, low fees, and an online dashboard - then we’re considering it a robo advisor for the sake of this comparison of the best robo advisors, even if the service includes a layer of human advice.
Everything You Need To Know To Decide If Robo Advisors Are Right For You
What is a robo advisor?
Robo advisors are becoming one of the fastest growing products within the investment landscape but what exactly are they, and what benefits do they hold for an investor in today’s marketplace?
At their core, Robo Advisors are an online wealth management tool that use bespoke algorithms to construct, manage, and optimize an investment portfolio at a fraction of the cost of a traditional advisor.
This low cost, high impact approach to investing has proved immensely popular with investors, and overall assets under management within the robo investing space are forecast to reach $2 trillion by the year 2020 according to a recent report by consultancy group A.T Kearney. Such a rapid jump in assets under management suggest that robo advisors are getting something right and in the following guide we will put some of the major features of this new way of investing through the paces, and shed some light on what these new kids on the block have to offer.
The rise in popularity of robo investing comes at a turbulent period for the wealth management industry - an industry suffering from the “profit before people“ attitude employed for much of the past two decades on Wall Street. In their quest for greater fees, many traditional advisor firms pursued a “growth at all costs” strategy - focusing all of their attention on asset gathering with scant consideration for performance.
As a result, returns at many traditional advisors have often failed to beat the broader market, prompting many to ask what value these advisors actually add. The whole process was ripe for disruption, and this new breed of Robo advisors have been attacking the advisory industry with the same gusto that other disruptors like Uber or Airbnb have accomplished to great success in both the taxi and accommodation markets.
With the entire US investment industry valued somewhere in the region of $30 trillion, the prize on offer for these firms is enormous, and individual investors will also benefit as the advisory industry morphs into a more cost effective, transparent environment where brokers have to add REAL value to earn their corn. So without further ado, let’s examine some of the key features of these robo advisors to determine if the services on offer are right for you.
True to form with their emphasis on low costs, portfolios constructed by the major robo advisor firms are comprised of established ETFs which offer liquid and cost effective access to a variety of underlying markets. Client funds are allocated according to the investor's overall risk tolerance among a diverse set of asset classes including US Stocks, US Bonds, International Stocks, International Bonds, and alternatives.
Not surprisingly, the major ETF players are over represented here with Vanguard, iShares and Charles Schwab accounting for a large portion of the underlying funds, all of which are cost effective. It’s important to note that investors will still incur fees associated with ETFs on top of the advisory fees, just as they would if they were adopting a fully DIY approach to portfolio management.
Goals and Risk
Individual asset allocations are dependent upon factors such as an investor’s overall risk profile, savings goal or time horizon. Each robo advisor firm has its own way of carrying out this assessment and typically involves an in depth questionnaire regarding an investor's current financial position and savings goals. Firms like Betterment even incorporate a retirement calculator into the process in order to establish a profile in line with an investor's objectives.
Once this profile has been established a model portfolio is constructed based on the investor’s individual profile.
A typical portfolio for an investor with a moderate tolerance for risk produces a fairly standard split between equities and fixed income although there is a good deal of variation between advisors so investors should definitely play close attention to performance histories.
Taking Charles Schwab as an example, a typical portfolio mix consists of (US Stocks: 30%, International Stocks: 30%, US Bonds: 12%, International Bonds 10%, Alternatives 19%). A similar portfolio from Betterment consists of (US Stocks: 34%, International Stocks: 36%, US Bonds: 16%, International Bonds 14%, Alternatives 0%) and WealthFront (US Stocks: 41%, International Stocks: 31%, US Bonds: 23%, International Bonds 0%, Alternatives 5%).
Providing professional and actionable advice at low cost is the bread and butter for all robo advisors and the greatest distinguishing feature compared to traditional Wall Street advisors.
Most of the top robo advisory firms charge between 0.15% and 0.5% as an annual asset management fee - a bargain compared to the 1-3% which many traditional advisors currently charge. This large disparity in fees means investors could wrack up some fairly significant savings by going down the robo advisory route - a point many industry insiders are quick to point out.
Mike Sha from SigFig estimates that a typical investor could boost annual returns by as much as $5000 per year through reduced management fees alone. Sha’s claims are relatively easy to back up - taking a real world $100,000 portfolio as an example, investors could boost returns by $2,500 alone on management fees, and stand to gain even more should they switch their execution accounts to discount players.
With increased returns of nearly 3 percent before a ball is even kicked it’s easy to see why this new breed of advisor is attracting so much attention. Use our calculator to see just how much you could save.
Unlike the traditional wealth management industry, robo advisors require extremely low account minimums to take advantage of their services - often running as low as $500.
An account of $500 would be shown the door fairly quickly at a traditional advisors office - so robo advisors have a clear edge here with their ability to provide professional actionable advice at scale offering smaller investors access to quality advice previously outwith their reach.
The passive management, or "indexing" style of investment which many of these robo investing firms employ means performance is largely tied to prevailing market conditions. Indexing is a herd style of investment which brings with it its own set of problems but also reduces the risk of both fund manager and timing bias - investors following this strategy are tying their performance to just a handful of world indices which is something investors should definitely keep in mind.
As a result, returns from the major robo advisors mirror the benchmark US equity indexes plus or minus any upside from other components of their portfolio which usually consists of ETF exposure to International stocks and bonds. An important thing to watch out for with any advisory service is the inclusion of hidden fees or portfolio requirements which could drag on return.
Some robo advisors require investors to hold a proportion of their portfolio in cash (presumably as a source of cheap funding forthe advisor) which could negatively impact returns under certain market conditions. The most extreme example we have found of this so far is at Charles Schwab who require investors to hold between 6% to 30% of their portfolio in cash depending on their stated risk tolerance. Definitely something to watch out for!
Should you use a robo advisor?
The value proposition of robo advisors is based entirely upon the quality of the underlying algorithms. By automating some of the more mundane aspects of the investment advisory industry, robo advisors provide professional and actionable investment advice at the fraction of the cost of traditional advisors. The result is a well diversified, tax efficient portfolio which conforms to an investor’s risk tolerance - something novice investors can definitely benefit from in this increasingly harsh world where most people are left to fend for themselves in preparing for retirement.
If you are a complete beginner to investing, robo advisors offer a painless and cost effective way to get a well balanced portfolio up and running which conforms to professional portfolio theory techniques. The services on offer will also be of great value to investors with smaller account sizes who up until now have been locked out from professional advice in the traditional advisory world, and have relied largely on potluck and advice from friends as their primary investment strategy.
The benefits of robo investing are not exclusively tied to novice investors of course, experienced investors can also take advantage of some of the more complex functions robo advisors provide including tax optimization and ensuring that a their portfolios are enjoying the lowest execution fees on offer.
Tax Loss Harvesting Basics
Many of the robo advisors on offer help ensure that an investor’s portfolio is as tax efficient as possible. To accomplish this, many of the larger players offer a Tax Loss Harvesting strategy (a well known process among sophisticated investors of using investment losses to help boost after-tax returns) as part of their advisory services.
At the most basic level, tax loss harvesting is a tax deferral strategy which involves selling a security currently running at a loss and buying a correlated asset in its place to provide almost identical exposure. Through this process an investor is able to “harvest” a loss which they could then offset against future tax while ensuring the portfolio retains its optimal portfolio mix.
Effective tax loss harvesting can be a real headache if done manually but with robo advisors the process is a seamless process letting investors concentrate on investment decisions rather than complex administration. Betterment, one of the largest players in the robo advisor space, takes particular pride in its Tax Loss Harvesting strategy, claiming their service could have boosted after-tax returns by as much as 0.77% over the past 13 years for an average investor.
It's worth keeping in mind however that while tax loss harvesting is a highly effective way of offsetting capital gains tax or for sheltering up to $3,000 in ordinary income, the strategy certainly isn’t suitable for everyone. For investors in a tax bracket low enough to realize capital gains tax free, or for those investing solely in tax-sheltered accounts, then it goes without saying that they would find no need for the various robo advisors’ tax harvesting strategies.
Investors who are expecting to earn a substantially higher income in the future might also be discouraged from using the services, as the tax deferral strategy could ultimately result in more taxes in the future. So it’s important for investors to brush up fully on their current and future tax situation before committing to these types of services.
No Magic Bullet
Like almost anything in the financial sphere, robo advisors are definitely not a one stop shop for all investors - there is no one size fits all solution here and the complexity of an investor's own financial situation will largely determine how useful robo investing services will be in the long run.
While there can be no doubt of the benefit these services offer to novice investors or those just starting out, more experienced investors may still feel that robo advisors are eating too much into their potential profits. For DIY investors, it can be hard to justify paying and advisor like WealthFront a fee of 0.25% a year to create a portfolio of index securities when there are existing index funds which do the same job with far cheaper fees.
As a concrete example, an investor with a $1 million dollar portfolio with WealthFront would incur management fees of $2,500 versus $500 for the cheaper option of investing in the same underlying index fund such as Vanguard.Knowing what index funds to pick and under what circumstances and ensuring a portfolio remains optimally balanced of course is a different matter, and one which many investors are more than willing to pay for, but the cost differential is certainly something that potential investors should keep in mind.
Critics of the industry are also keen to point out that the fee structure for robo advisors still reflects too much of the old Wall Street way of doing things. The proportional fee structure whereby investors pay more as their assets increase, is one which often comes under scrutiny by those in the industry calling for true disruption. Again, these types of arguments are really splitting at hairs and many investors would be probably perfectly happy to see the amount of fees paid out to an advisor increase if it meant their assets were growing.
Sure these fees can rack up overtime and reducing them would certainly speed up the time required for an investor’s ultimate saving goal, but most investors are just looking for a solid, reliable service with which to grow their wealth for retirement and Robo advisors in this instance certainly fit the bill. By no means are any of the advisors on offer are perfect, but the niche investment services which they currently cater to are relevant, and they do them extremely well.
If you have weighed up all the pros and cons of robo advisors and wish to proceed then you will need to select an advisor most suitable to your own particular set of circumstances.
Trawling the various features each firm offers is a fairly tedious task so we have set up an easy to use comparison tool which should help get you on your way. After submitting just a few pieces of information, our in depth robo advisor comparison tool will scan through our comprehensive industry database, helping you find a suitable advisor which meets your needs.
Remember there is no one size fits all solution when it comes to robo advisors so it’s important to narrow down your search to the features which are most important to you personally. Some of the most important factors to consider include fees, minimum deposit, tax loss harvesting, and perhaps the ability to contact a human advisor should you wish to do so. For a complete rundown, check out our comparison tool above.
The Future of Robo Advisors
Love them or hate them, robo advisors are here to stay. The low cost, passive investment strategy which these advisors promote are fast becoming the prefered option for many investors, especially among millennials who have been quick to take advantage of the low account minimums.
The latest industry data from Bloomberg shows that passively managed stock mutual funds and ETFs gathered $257 billion worth of assets in 2015 compared to redemptions of $108 billion at actively managed funds. Of this figure, pure robo advisors are estimated to control roughly $50 billion worth of assets as of 2015 although the inclusion of hybrid firms pushes this number much higher.
The scale of this shift is unprecedented and is likely to increase further as more firms enter the robo advisory space in the near future. Major banks including Morgan Stanley, Wells Fargo and Bank of America have already announced plans for robo investing platforms which will likely drive fees down even lower as the battle for market share heats up.
On balance, robo advisors certainly won’t be to everyone’s liking, but few could argue that this new breed of advisor truly excels at constructing portfolios for the novice end of the market - something which would have been completely out of reach only a few short years ago. It’s clear that the old ways of shearing investors with high fees in return for a monthly or quarterly statement with no value added are gone. Going forward advisors will have to add real value to justify their services and that can only be a good thing.