A robot advisor (robo-advisor) is precisely what it sounds like – an automated financial advisor who manages your money or provides algorithm-based financial advice. Because many decisions can be categorized without human intervention, a robot trader can be a great way to consider investment strategies without running through your personal portfolio with a human financial advisor. This guide offers a thorough and insightful look into the world of robo-advisors.
- What is a robo-advisor?
- How does a robo-advisor work?
- How to get started with using robo-advisors
- What are the fees for robo-advisors?
- Features of robo-advisors
- What are the benefits of robo-advisors?
- The best robo-advisors of 2024
- The limitations of robo-advisors
- Are robo-advisors for you?
- Frequently asked questions
What is a robo-advisor?
The concept of robo-advisors emerged in 2008, a year following the 2007 economic crash, and gained significant popularity during the peak of the Great Recession in 2009. These advisors offer user-friendly interfaces for financial decision-making. In 2024, robo-advisors have evolved, integrating blockchain technology and decentralized finance (DeFi) principles. They assist users in identifying their risk tolerance, setting goals for different life milestones, and autonomously managing investments in alignment with those objectives.
How does a robo-advisor work?
Robo-advisors serve multiple purposes. They help consumers discover their risk tolerance, set goals for life milestones, and manage investments based on those goals. These advisors employ algorithms to optimize portfolios for tax efficiency and active diversification.
They constantly monitor and rebalance investments 24/7, responding quickly to market changes. Additionally, they use artificial intelligence (AI) to offer personalized financial advice and predict future economic scenarios, improving users’ decision-making.
How to get started with using robo-advisors
Robo-advisors are carefully designed by experienced investment advisors with decades of experience in the financial sector alongside tech and design professionals. There are several robo-advisors worth considering while you shop for the best match. They often have easy-to-use dashboards, initial surveys to help you understand their work, and clear deliverables defined before signing up.
To begin, conduct your research to find one that aligns with your investment and finance goals, risk tolerance, and budget. Once you’ve chosen a robo-advisor, you must create an account. This process typically involves providing personal information, such as your name, address, Social Security number, and possibly some financial information.
What are the fees for robo-advisors?
Robo-advisors typically charge management fees that are considered relatively cost-efficient when compared to traditional brokerage fees. These fees usually range from 0.25% to 0.75% of your yearly portfolio. This fee structure represents a significant saving when compared to the traditional financial advisor fees, which are generally higher.
Some robo-advisors also offer flat monthly rates for their services, varying between $1 to $9 per month, depending on the features and services provided.
Features of robo-advisors
When considering the use of robo-advisors for your investment needs, it’s important to take into account a few additional features they offer, such as:
- Portfolio management: Robo-investors create personalized investment portfolios, often based on the Modern Portfolio Theory, which allocates funds to diverse, uncorrelated investments. These platforms adjust investment ratios in response to economic changes, aligning with the investor’s risk profile and goals.
- Tax-loss harvesting: This strategy involves selling assets at a loss to offset capital gains tax liabilities and is a standard service offered by robo-advisors. Robo-investment platforms automate tax-loss harvesting efficiently and cost-effectively, removing the need for manual intervention.
What are the benefits of robo-advisors?
According to data from Statista Market Insights, by 2027, assets under management are expected to reach just past the $4.5 trillion mark. The growing popularity of robo-advisors in investment management allows investors to easily diversify their portfolios through user-friendly apps and calculators, often accompanied by low management fees. These platforms frequently provide the option to consult human investment advisors for complex decisions or to gain clarity on investment strategies.
Additionally, robot advisors can be a great option during market uncertainty because the human emotional element is removed from the decision. Rather than agonizing over losses or deciding when it will be the best time to buy or sell, robo-advisors can keep the investor on track based on their predetermined investment plan.
The best robo-advisors of 2024
1. Betterment
On top of our list of the best robo-advisors is Betterment, which is an excellent answer to the “how do beginners make money in the stock market” question. Betterment was launched in 2008 as the first robot platform. It started accepting customer deposits in 2010. Since then, the service has remained a leader in the industry.
Betterment is the largest independent robo-advisor, with $40+ billion in assets under management, it belongs on our list of top robo-advisors. It charges minimal fees and provides exposure to many assets, thus giving you the best of both worlds.
Their Betterment Digital service provides automated portfolio management starting at just $10, while Betterment Premium offers unlimited phone access to certified financial planners for accounts with a minimum of $100,000. Betterment stands out for its multiple portfolio options, including customization, and maintains a low account minimum, making it accessible and appealing to a wide range of investors
Account setup
Betterment’s account setup process remains user-friendly, especially for mobile device users. New users are required to input personal details like age, annual income, and investment objectives. Unlike some other platforms, Betterment doesn’t focus on risk-related questions; instead, it suggests an asset allocation with the associated risk, which users can adjust based on their equity versus fixed income preference.
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Betterment encourages linking external accounts, such as bank and brokerage accounts, for a comprehensive asset overview and easier funding. The service supports individual and joint accounts, Roth and traditional IRAs, and trusts but does not offer solo 401(k) accounts, college savings plans, or Uniform Gift to Minors Act accounts.
Account minimum
Betterment offers two primary service options: Betterment Digital, which has no minimum balance requirement, and Betterment Premium, requiring a $100,000 minimum balance and charges a 0.40% annual fee.
Betterment Premium provides clients unlimited phone access to certified financial advisors, offering personalized financial planning and advice. Both services feature tax-loss harvesting as a standard, with no additional cost, emphasizing tax efficiency in investment strategies.
Top features:
- Financial planning: The company provides packages tailored to specific life events. These packages include a 45-minute “getting started” session for new clients to help them set up their accounts effectively. Other packages are focused on saving for college, marriage, retirement, and general financial well-being. These services offer personal advice sessions, typically lasting around 60 minutes.
- High-yield cash account: The account does not require a minimum balance, and the FDIC ensures each customer’s savings up to $1 million. Additionally, Betterment offers a checking account that comes without minimum balance fees, maintenance fees, or overdraft fees.
- Two-Way Sweep: This feature enhances cash management by automatically transferring funds between your Betterment savings and checking accounts based on specific criteria.
Customer support
On Betterment, you access customer service representatives by phone and email from 9 AM to 6 PM from Monday to Friday. This access is only available on weekends from 11 AM to 6 PM.
Pros
- Easy to set up
- Affordable advisory charges
- Flexibility to select diverse portfolio options tailored to individual objectives
Cons
- Higher-than-average costs for expert financial guidance
- Potential risk concerns with the emergency fund investment approach
2. Ellevest
Ellevest focuses on empowering women by offering tailored investment solutions, a step towards bridging the gender wealth gap in finance.
While its core mission is to support women investors, the platform is inclusive and open to clients of all genders. Ellevest has integrated most of its offerings into a convenient monthly subscription model to streamline its services, making it more accessible and easier to manage for users.
Account setup
Ellevest provides easy access to executive coaching for career guidance, salary negotiation, and Private Wealth Management for individuals investing $1 million or more. This high-tier service includes a dedicated financial advisor, customized portfolio construction, and specialized investment options. Ellevest’s “Plus” plan and higher tiers offer unlimited support from a Concierge team to assist with various queries, including IRA and 401(k) management.
Account minimum
Ellevest’s investment service allows you to start without a specific minimum balance in your account. However, achieving the full benefits of certain portfolios may require reaching specific balance thresholds, which vary between $1 and $240.
Top features
- Spend and save: Ellevest provides a MasterCard debit card with features including ID theft resolution and contactless payments, and there are no fees for minimum balance, overdraft, or card replacement. Banking products are from Coastal Community Bank, ensuring FDIC insurance up to $250,000.
- On-demand learning: The platform offers educational resources on investment and career development, with access to human financial planners at an additional cost.
- Fees: Ellevest has three subscription levels: Essential ($1/month) with investing account access and spend-and-save benefits; Plus ($5/month), which includes retirement planning assistance; and Executive ($9/month) offering diverse portfolio options and a 50% discount on future learning sessions.
Pros
- Low membership fees
- Unlimited access to online workshops, email courses and video resources from experts
- Offers private wealth management for high and ultra-high-net-worth individuals, families and institutions
- No account minimum
Cons
- No tax-loss harvesting
- 0% APY on cash management account
3. SoFi Invest
Since its inception in 2011, SoFi has been renowned for its top-tier financial products, and its SoFi Invest® platform is a standout example. This automated investing service boasts no account management fees and eliminates the need for minimum account balances. It features an extensive selection of low-cost ETFs and ensures quarterly portfolio rebalancing. SoFi’s robo-advisor is especially notable for its additional investing benefits, including unique bonuses, setting it apart in the robo-advisory sector.
Account setup
SoFi Invest offers Automated and Active Investing with zero management fees and no minimum investment. Automated Investing uses ETFs for diverse portfolios, while Active Investing allows commission-free trading of stocks and ETFs. Both options feature automatic rebalancing and access to free certified financial planners. Opening an account is simple, requiring users to answer questions to tailor their portfolio to their investment goals and risk tolerance.
Account minimum
SoFi has no account minimum.
Customer support
SoFi Invest offers customer support through email, chat, and phone, with phone support available daily from 5 a.m. to 5 p.m. PT. It’s important to note that assistance specifically related to investing is only accessible on weekdays.
Fees
The platform offers a promotion for new users signing up via the mobile app, where they can receive between $5 to $1,000 in free stock. The platform has no account minimum requirement, allowing users to start investing with any amount, and charges $0 per trade. SoFi Active Investing is particularly well-suited for active traders, ETF investors, and those interested in buying fractional shares.
Pros
- Fractional shares available
- Free financial counseling
- No management fee
Cons
- Low interest rate on uninvested cash
- Requires $10 to start investing
The limitations of robo-advisors
Robo-advisors offer automated management and goal setting but may lack the depth of human financial planners, especially for complex needs; here are some of its limitations:
- Robo-advisors vs. financial planners: Robo-advisors are marketed as automated financial planners, but they must offer the comprehensive, personalized planning a human financial planner provides. They are efficient in portfolio management but need to tailor strategies to real-life individual situations.
- Personalization: Robo-advisors offer basic customization for investment goals but need more depth of personalization for complex financial needs. They often allow users to consult certified financial planners for detailed guidance.
- Performance: Like all investments, robo-advisors have risks, and their performance is not guaranteed. Returns are dependent on the market performance of the selected assets.
Are robo-advisors for you?
Robo-advisors manage investments without requiring a human financial advisor, often featuring low or no minimum balance requirements, which makes them accessible to a broader range of investors. If you value ease of use, minimal hands-on management, and affordability, robo-advisors could be a fitting choice. Whether robo-advisors suit you depends on your investment needs and preferences. They are ideal for those seeking a streamlined and automated approach to investment, particularly beneficial for newcomers or those with straightforward portfolios.
Frequently asked questions
What are robot advisors?
How do robot advisors work?
What are the benefits and limitations of using robot advisors?
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