How to Choose a Robo-Advisor

As technology evolves, robo-advisors have become an alternative to meeting with a traditional advisor. While it can vary, they generally involve depositing money into an account and then letting a company’s proprietary technology and algorithms invest and install recommended strategies on your behalf. Because they often omit the face-to-face, hands-on aspect of working with a human professional, robo-advisors also tend to be more cost-effective.

But more accessibility to consumers furthers the diversity of options in front of you. So, how do you know which robo-advisor serves your needs the best? In this article, we’ll highlight factors to consider if you’re searching for an automated advisor, including an overview of weighing costs, researching investment methodology, and what to look for in reviews.

1. Consider If a Robo-Advisor is Right for You

Before choosing a robo-advisor, you’ll have to think about whether it’s the right advisory solution for you. This involves an understanding of both the benefits and shortcomings that come with them.

While they can be a streamlined and relatively cheap investing tool, robo-advisors offer a much different arrangement than working face-to-face with a traditional advisor. Often, there’s little to no contact with a human and it requires placing trust in a company’s technology to build and manage your portfolio effectively.

Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, suggests asking yourself, “Do I have the fortitude to stick to the plan devised by the robo advisor or will I panic and sell during the next market dislocation?” He continues, “The greatest value provided by financial advisors is not in the technical sphere. It is reassuring clients that they are on the right path during periods of great market volatility.”

With a robo-advisor, you don’t typically have an experienced professional telling you the plan is on track. Instead, you’ll need to trust that the service will adhere to the plan it has in place and that the strategy will help you accomplish your goals. If you believe you can do this, a robo-advisor may be a viable solution.

2. Decide What Services You’re After

If you’ve settled on choosing a robo-service to handle your portfolio, you’ll need to decide what services you want to receive. In most cases, robo-advisors act as discretionary automated portfolio managers, making trades and rebalancing on your behalf based on information you’ve provided about your goals, risk tolerance, and time horizon. Then, they’ll often in invest in securities, such as index, mutual, and exchange-traded funds (ETFs), that include a diverse mix of assets.

For an extra cost or minimum investment, however, some robo-advisors might also include the ability to work with one or more human professionals. This may include services such as financial planning with a professional over the phone or video or additional input from a team of portfolio managers. Certain digital advice companies may also include tax optimization services, such as tax-loss harvesting, automatically baked into the default fee.

As mentioned, many robo-advisors focus on investing in professionally managed mutual funds or ETFs. While some companies may choose these automatically based on your inputted information, others allow you to select from a range of options. Betterfront, for example, includes choices to focus on socially responsible investing, tech, cryptocurrency, and more.

While automated investing is a core function of most robo-advisors, many include add-ons by default or for an extra fee. Others also give you a heightened level of options for investing in your portfolio. Therefore, an important step in choosing a company is deciding which, if any, extra services and investment focuses you value.

3. Think About How Much You’re Willing to Invest

Account minimums for robo-advisors tend to vary. Although, for the most part, many are very accessible to consumers, coming with extremely low minimums — sometimes as low as $10. Others, like SoFi Wealth, don’t require you to have any specific amount of money at all to open an account. There are, however, some robo-services that have higher minimums, ranging from $500 to $2,000.

Ultimately, you’ll need to consider how much money you want to invest. After doing this, you’ll have a more informed view of which companies you could consider using as an advisory solution.

For instance, if you’re a novice investor or would prefer not having minimums, you’ll need to narrow your search to companies that either don’t have requirements or have low thresholds. On the other hand, your field of options will immediately widen if you’re more able to deposit a large sum, allowing you to consider nearly every service on the market.

4. Weigh Cost and Fee Structure

As noted, one of the most prominent draws to using a robo-advisor is their relatively low cost, specifically when compared to regular experts. Per Johnson, “The cost of robo advisors is considerably less than that of human advisors.” Combined with their often low minimums, this can make them much more accessible to all clientele. However, not all of them use the same fee structures, making it crucial to think about which makes sense to you.

Some robo-advisor providers may market their service as having no fee structure. This doesn’t mean the service comes at no cost, though. Instead, they make money through other avenues, such as transaction costs and brokerage expenses for managing your account. In other words, you only pay when a transaction occurs, or if an investment has associated costs.

Perhaps the most common fee schedule you’ll see from a robo-advisory service is a percentage of the dollar amount of your assets under management (AUM). This involves the company taking a small — often less than 1% — monthly, quarterly, or annual percentage of your portfolio value as a fee. In many cases, though, a robo-advisor will use a wrap-fee structure, which includes the AUM advisory fee as well as the additional costs to manage your account in one price.

5. Understand Investment Methodology

After considering cost, the next aspect to understand about any robo-advisor service you’re thinking of using is its investment methodology. That is, what strategies, techniques, or models will it employ as it plans and manages your portfolio? For example, this might include the types of securities it favors, whether it’s conservative or aggressive, or if it uses environmental, social, and corporate governance (ESG) investing.

A key characteristic of working with a financial advisor — whether in person or using digital tools and services — is trust, especially when they have discretionary control over your portfolio. In that way, being acutely aware of how the robo-advisor works behind the curtain will help you decide if you would feel comfortable trusting it and whether its tactics align with your goals.

One of the most straightforward methods of ascertaining a company’s methodology is by reading the company’s official documentation on the subject. Many firms include links to methodology documents or white papers highlighting their strategies. While these can get into the weeds in some cases, many try to put them in terms most people, including potential clients, can read.

You could also try looking up Part 2A of the advisor’s Form ADV, which will outline investment strategies, risks, and other information, such as fee structures and specific services to expect. This document is commonly listed on many firms’ websites — often in the footer or on a disclosures page — but is always accessible via the SEC’s Investment Adviser Public Disclosure (IAPD) search tool.

6. Read Reviews

Sometimes, knowing what other people think can help you make a more informed decision about signing up for a service. Therefore, it can be vital to read reviews written by clients, consumers, and industry experts about robo-advisors. This can give you a better idea of where firms stand, including their good and detrimental qualities.

Specifically, look for reviews that touch on the following details:

• Usability. You’ll be viewing your portfolio and adjusting settings through a firm’s website or mobile app. Therefore, look for reviews that describe the quality and ease of the user experience.
• Customer service. How well will the company respond if you have questions? Search for reviews talking about customer satisfaction and the process of contacting support.
• Pros and cons. A review, written by a user or an editorial site, that outlines pros and cons can help you quickly see the positives and negatives of a robo-advisory product.

Reviews can take many different forms on the internet. Firms may have listings online, whether on Google or a mobile app store, that include reviews from real users or customers of the service. These are beneficial because they’re designed to give you the authentic perspective of people who’ve had experience using the service but can tend to be from unhappy clients or may have incomplete information. In other cases, you may find editorial reviews from personal finance websites. These can help give you a detailed overview of what the service offers; however, they may not give you an in-depth explanation of what it’s like to use the advisor.

Below is a list, in alphabetical order, of well-known robo-advisors we’ve reviewed:

• Acorns
• Betterment
• Fidelity Go
• Ellevest
• Merrill Guided Investing
• Morgan Stanley Core Portfolios
• Schwab Intelligent Portfolios
• SigFig
• SoFi Wealth
• TD Automated Investing
• U.S. Bank Automated Investor
• Vanguard Digital Advisor
• Wealthfront