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There’s a new kid on the block and it’s the kind of person you weren’t looking for but now totally want to know. (big statement to make, I know). Let’s talk about how to choose a robo-advisor.
Not exactly a person, more like an automated service. These automated services walk you through what you want to do with your money and create a portfolio plan around it.
If you’re any more than an occasional reader of personal finance blogs, you are probably aware of the importance of investing. You’ve seen the charts showing how magical compound interest is, stood awkwardly while baby boomers told you retirement horror stories, and even saw the fake quote from Albert Einstein about how compound interest was the 8th wonder of the world.
You know investing is important but you don’t want to have to research what funds to pick, how to rebalance your portfolio, and do a bunch of other things that leave you puzzled.
You want a passive option that allows you to be investing while not having to get too involved with managing your investment portfolio. Let’s talk about how to choose a robo-advisor.
How I (finally) got started investing
Set out to do good for myself, I got enrolled in a 401k plan at my first full-time job and it came with an employer match. I contributed into the 401k but didn’t really know anything about investing. Scratch that, I knew *nothing* about investing. So the money just sat there in my account, for several months, not invested in anything.
A few months later, I opened up a Roth IRA with Fidelity (the same place where my 401k was). I was excited and ready to invest! But…most of Fidelity’s funds came with a $2,500 minimum to invest. I had nowhere near that.
After moving on from that first job, I rolled the 401k into my Roth IRA and started to look at how to invest.
I read several blog posts, listened to podcasts, and read a really great book called, The Index Card: Why Personal Finance Doesn’t Have to be Complicated. The information, although all good, didn’t give me the desire to fully manage my hypothetical investment portfolio.
Mulling over options, I came across the idea of using robo-advisor services. I wondered how to choose a robo-advisor service that was best for me. The top two platforms, Betterment and Wealthfront, both offered a very nice appeal to a beginning investor like me. Both services offered automatic rebalancing and investment portfolios geared towards your risk tolerance and goals.
It came down to fees and situation. I chose Wealthfront, since you can get the first $10,000 in assets managed for free. The fees becomes a flat rate of 0.25% after $10,000.
Now I have a portfolio of low-cost ETFs and my investing is automated! I don’t have to check on it as often as a do-it-yourself type of approach. I like that.
How to choose a robo-advisor
I want to go through some ways to help you figure out how to choose a robo-advisor for you. Let’s get crackin’
1. Management fees
One of the big things to do when investing, besides the actual investing part, is to keep your fees as low as possible. Fees from the funds you’re invested in, advisor/management fees, trading costs, they can all add up.
As actor Billy Eichner says, Keep your fees, like your milk, under 1%. Keep them wayyyyy under 1%.
Betterment charges a 0.25% advising fee. Wealthfront is free, having no advising fee on the first $15,000 managed. It becomes 0.25% after that.
2. Investment Options
With many robo-advisors, including Betterment and Wealthfront, you don’t have a choice in which funds to invest your money. The investment decisions are made by the platform (usually via a computer algorithm). So it’s important to see what investment options there are when looking at how to choose a robo-advisor.
The money is often invested in low-cost ETF’s like a total stock fund, emerging markets, international, and some bond funds. What is unique is your asset allocation (the percentage you have in stocks and bonds) based on your risk tolerance, which is usually based on a short questionnaire you fill out.
3. Minimum Opening Deposit
When you have little money to invest, low or no account minimums can be *wonderful*. Betterment offers no account minimum ($0, yeah!) and Wealthfront has a $500 account minimum.
Don’t focus too much on getting one with the lowest account minimum. Keep in mind the full scope of features, interface, and fees each platform has to fit your needs.
4. Platform Interface and Features
One of the things surprisingly mentioned when looking at how to choose a robo-advisor is their online interface. Some of them have really great interfaces that help you visualize your long-term goals and figure out ways to do more.
This is so great at motivating you to save for retirement and your other goals.
Betterment offers a RetireGuide calculator that shows you how much your money will amount to over time and how much you need to save per month or year to reach your goals. It lets you customize your accounts to different types of goals you have (retirement, house down payment, etc.)
Wealthfront offers a similar thing with their Path tool, a visual interactive tool used to set and see your savings goals over time. You can also connect your accounts to monitor your spending with it.
Robo-advisors are a fresh face when it comes to the world of investing. It’s going to be interesting to see how they do in the years to come.
A lot of people, including seasoned investors, are critical of them due their new-ness and spot in the investing world. We all have to start somewhere, right? Robo-advisors can be a great way to get started investing or for people who know they should invest but don’t want to manage it too much. For me, when it came to how to choose a robo-advisor, it came down to three things: fees, investment options, and customer help/online tools.
I want to keep my fees as low as possible, while still being able to passively invest. Ultimately I went with Wealthfront.
For investment options, I wanted to make sure most of the pre-selected investment options were low-cost funds. Also, looks matter (sort of… :)). I wanted a platform that had an interface that made it easy to enable auto-deposits, give a snapshot of investment loss or growth, and show me how much to save based on my goals.
You’ll still find me reading over articles on investing and looking over different investment portfolios, but for now, using a robo-advisor service like Wealthfront works great for me.
Are you confused about the world of investing and want to learn more? Enroll in my free 7-day Investing 101 For Millennials email course.
Just two years ago, I knew nothing about investing and kept all my money in a savings account earning 0.05% interest. Once I learned more about investing and it’s power to build wealth, I got started with it. Investing doesn’t have to be overwhelming or scary!
The course will walk you through the basics of investing, why it’s important, why everyone should be doing it, and how to set up and get your first investing account ready to go.
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Have you ever considered using a robo advisor? How do you choose the best robo advisor?
Colin // RebelwithaPlan
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2 Comments on How To Choose The Best Robo-Advisor For You
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DC @ Young Adult Money
March 4, 2017 at 11:14 pm (8 years ago)I think most millennials are turned off at the idea of working directly with a CFP, partially due to the fact that CFPs either charge a hefty hourly rate or sell ancillary products and services that they receive a commission on. Robo advisers, from my understanding, also have those ancillary products they sell but at least it’s not the in-person pressured sales tactic that CFPs and others will use from time to time.
Colin // RebelwithaPlan
March 9, 2017 at 8:01 pm (8 years ago)You’re so right. I always try to refer other millennials towards resources like XY Planning Network. They have a big list of fee-only fiduciary financial planners! The robo-advisors (mainly Betterment & Wealthfront) have made some big improvements in the last few weeks to their services.