Are you wondering which robo advisor is best suited for your needs? If you are not an economist or financial expert, it is difficult to know which robo advisor to choose. With so many choices, how can you find the right one? Given this inherent difficulty, we have created a comparison tool, one capable of informing the total layperson on the strengths and weaknesses of the various robo advising options out there, directing you towards a robo advisor custom tailored towards your specific needs. All you need to do is input some basic information about your specific situation, and we will match you to the best robo advisor for your individual needs.
Right now, Wealthfront and Betterment offer the most cutting edge innovations in robo advising services. Each company manages around $3 billion USD in assets. You can compare Betterment vs. Wealthfront at Wirefly.
Compare Robo Advisors
When you are trying to pick the right robo advisor, you should consider a number of factors. Let's look at some of the most important ones, and define the terms you need to know.
From the majority of robo advisors, you will be required to pay a percentage of your profits in an amount proportional to the size of your portfolio. In the majority of cases, however, these fees will be significantly lower than the typical one percent fee required for a traditional financial advisor.
Sometimes, a robo advisor will offer additional human support alongside their online machinery and automated backend. In such cases, they typically charge an additional fee for these human consultations.
When calculating your costs, remember that, in addition to any upfront fees you might be charged, you will also have to pay any fees embedded in the investments themselves. These might include management fees of mutual funds or exchange traded funds (ETFs). Bear in mind, however, that you will often have to pay these costs anyways if you are in charge of your own portfolio.
A number of robo advisors (for example, Charles Schwab's Intelligent Portfolios) will add additional hidden fees, charging you for significant non-optional monetary allocations, paying you only a small percentage of the earned revenue.
If your robo advisor lacks the features necessary for your given individual situation (like, for example, failing to harvest tax-losses for a taxable account), this can cost you additional revenue, making your stream of income less efficient. Make sure you pick the robo advisor that gives you what you need to address your own particular needs.
Minimal Initial Deposit
This refers to the minimum required monetary investment on your part, paid to the robo advisor initially upon opening an account with them. With new robo advisors, these fees can be incredibly low.
Single Stock Diversification
If a single stock (say, for instance, your company) holds the bulk of your net worth, single stock diversification can spread this out among a number of other options while saving you tax dollars and not charging commission, thus mobilizing your assets and averaging their volatility.
Direct indexing allows you to buy the full amount of individual securities within a major index, an alternative to owning a mutual fund that tracks the index. Direct indexing, according to some researchers, can provide you with significant tax-efficiency, an alternative that is often preferable to owning the equivalent index funds (ETFs), letting investors harvest revenue streams lost to tax dollars within the indexed individuals component stocks.
By using direct indexing, you can also eliminate various management fees associated with various funds or ETFS, costs that disallow the duplication of an index investment's performance. Nevertheless, when you actually calculate this, you should be careful to take the robo advisor's fee into consideration, otherwise you might be losing revenue.
Tax Loss Harvesting
What is tax loss harvesting? Although the process is a bit complicated, too complicated to quickly explain with any degree of complete adequacy, in layperson's terms, the concept is rather simple. In essence, tax loss harvesting gets rid of securities that have lost capital, substituting a similar security, helping counterbalance tax losses on your capital revenue.
Tax loss harvesting can significantly lower your taxable earnings by as much as three thousand dollars per year. The actual revenue you end up generating from such harvesting depends heavily on the amount of opportunities available per year, the tax bracket of the investor, the effectiveness of the robo advisor's algorithm, and many other factors.
Such tax loss harvesting offers one of the best opportunities for investors to increase their annual revenue without adding to their already existing risk. Bear in mind, nevertheless, that tax loss harvesting isn't ideal for everyone's needs. For example, investors who are exclusively maintaining tax sheltered accounts obviously will not see a benefit from such tax harvesting methods, making them superfluous. Likewise, if you are an investor with a zero percent capital gains tax rate, or fall into the ten to fifteen percent ordinary tax brackets, you might refrain from using tax loss harvesting, as it could be highly inefficient. Tax loss harvesting works best for investors in the highest tax brackets, looking to evade as many costs as possible.
If you are trading on an exchange, your transactions only involve whole shares. Such shares can provide additional revenue on the sidelines, cash that can create a silent drag on your returns.
On the other hand, you might use a robo advisor that allows you to trade fractional shares. Such systems allow traders to buy shares as small as one one-millionth of a share, a tiny fraction that makes your investing more efficient. Such fractional shares allow you to diversify every cent within your account, which means you always have revenue invested, since you always have the option to invest some fraction of it into a share.
Despite the name, the entirety of the process is not always automated. While many robo advisors are, in fact, full automated, others add a personal touch to their online interface, people supported by backend automation. Of course, you don't really need these human advisors unless they provide you with value. This forces them to make themselves relevant, or they will be replaced by automation.
In this brief survey of the different options available, we will include the services that contain a layer of human analysis, just to further diversify your selection of robo advisor options. Any automated advisor with automated rebalancing, reduced fees, and an online user interface, for our purposes, will be listed under the rubric of robo advisor.
What Exactly Is A Robo Advisor?
Robo advisors are rapidly taking over the investment landscape as one of the fastest growing resources for investors to use to manage their assets. Let's take a quick look at how robo advisors work and their benefits for those looking to invest.
A robo advisor, to put it in the most simple terms, is an automatic financial advisor designed to replace the role of a human advisor, managing numbers impossible for a human advisor to calculate. Robo advisors use complex algorithms to mechanically allocate, construct, control, and optimize your investment portfolio, while saving you the labor costs of a human advisor.
Many investors swear by robo advisors. The tool offers a high impact investing approach, one that significantly reduces your costs. By the year 2020, A.T. Kearney reports, robo advising will cover $2 Trillion USD worth of assets. The rapid increase in the robotic control over capital suggests that robotic investors have found a worthwhile approach. The robotic and automated control of private capital seems the way of the future. Let's see what the future has to offer.
Robo Advisors Offer Actionable Advice
Given Wall Street's current sentiment, one that often values increased profits without thinking about the effect this profit has on people, the wealth management industry has started to question the value of stock advisors, looking to cut them out of the equation by employing automated systems. Instead of simply maximizing the growth of assets, Wall Street turned to a different model, one that aims to focus on the efficiency of overall performance, rather than simple size. Instead of trying to acquire as many assets as possible, Wall Street now focuses on moving the money in efficient ways.
This change in model means that many traditional advisors have become superfluous. One might draw a comparison to companies such as AirBnB or Uber, which quickly destroyed the taxi industry. The process has been completely taken over by robo advisors, replacing the human advisors with completely automated controls, mechanically turning the gears of our economy with each new calculation. Truly, such automation is the way of the financial future, and one can only imagine how much more automation awaits us in the next few decades.
The US investment industry is value at about $30 trillion, and these firms have an incredible amount of money to make as the industry morphs into a network of robo advisors, introducing automated efficiency on a scale that has not been seen since Henry Ford. This adds the whip to the back of the brokers, as well, who will now only be able to earn their keep by adding actual value.
Let's look at some of the key features included in these robo advisors.
Robo Advisors Construct Your Portfolio
The major robo advisor firms focus on decreasing your costs. With this end in sight, these firms construct your portfolios from established equivalent index funds, ETFs that provide cost efficient liquid access to a plethora of heterogeneous underlying markets. These major robo advisor firms allocate their client's funds within the parameters of the overall risk tolerance variables decided upon by the investor, variables that comprise a number of various assets, including domestic and international stocks and bonds.
Vanguard, iShares, and Charles Schwab are the major actors on the ETF field and account for a great deal of the cost effective underlying funds. Be aware that investors still will accumulate the various fees associated with ETFs, just as if they were managing their portfolio themselves. On top of these fees, they will also be paying for the robo advisor service.
The Goals and Risks of Robo Advisors
What factors do your individual asset allocations depend upon? There are several relevant factors, including the investors saving goal, time horizon, and overall risk profile. Typically, robo advisor firms give you a lengthy and detailed questionnaire to glean this information from you, figuring out your financial position and savings goals much in the manner of an online dating website. Some firms even incorporate your retirement into the equation, letting you fill your profile with your ideal needs.
On the basis of this profile, the firm matches you with an ideal portfolio, based on your individual likes and dislikes.
What does a typical profile usually include? For an investor with a slight tolerance for risk, the robo advisor gives you a more or less standard division between your equities and fixed income. Of course, different advisors vary, so make sure you closely examine the records of each firm before making a commitment.
Let's look at Charles Schwab as an example of such a firm. A typical portfolio from Charles Schwab contains about thirty percent US Stocks, thirty percent international stocks, twelve percent US bonds, ten percent international bonds, and nineteen percent alternatives. Similarly, a Betterment portfolio might have thirty-four percent US Stocks, thirty-six percent international stocks, sixteen percent US bonds, fourteen percent international bonds, and no alternatives. Wealthfront, likewise, would contain forty-one percent US stocks, thirty-one percent international stocks, twenty-three percent US bonds, zero international bonds, and five percent alternatives.
Robo Advisor Fee Breakdown
What makes a robo advisor better than a traditional Wall Street advisor? Precisely the professional and actionable these services provide at an incredibly low cost.
What do most major robo advisory firms charge? Believe it or not, somewhere between .015 percent and 0.5 percent for an annual asset management fee. Compared to rates of one to three percent from the traditional Wall Street advisors, the savings from automating your advice are quite significant. This, as many industry insiders point out, is a great way to save money.
Mike Sha, a representative of SigFig, claims that a typical investor can end up increasing their annual revenue by up to $5000 simply from the money you save by using robo advisors. Sha's seemingly bold assertion resonates well with the facts, insofar as a real world $100,000 portfolio could increase their returns by $2,500 simply on the management fees, gaining even more from letting discount players execute their accounts.
Since the increased annual return is already almost three percent, just from savings on human power, the power of the robo advisor is clearly a force to be reckoned with.
Robo Advisor Account Minimums
The account minimums for robo advisors, given the automatic nature of their services, are incredibly low, some starting at prices as low as $500.
While traditional advisors would never accept an account as low as $500, robo advisors corner the market of small investments, giving them a competitive edge over traditional firms.
Returns To Expect With Robo Advisors
With passive management or “indexing” types of investment, your revenue largely depends upon the success of the market. Indexing works by bunching investments together in herds. While this has some problematic elements, it can significantly reduce the risk associated with fund management and timing biases. The robo advisors lack these human flaws, applying the cold calculation of formulas to data. As such, they are immune from such bias risks.
The returns from robo advisors typically correspond to benchmark US equity indexes, differing from this index by degrees related to non-US components of their portfolio. Hidden fees may also affect these returns.
If you work with a robo advisor that requires you to keep some of your portfolio in cash, this might also negatively impact your returns under the influence of certain conditions. Charles Schwab, for example, requires that anywhere from six to thirty percent of an investor's portfolio be held in cash, although such requirements are subject to how much risk they are willing to take.
Is a Robo Advisor Right For You?
The value that a robo advisor generates depends entirely on its algorithms. Robo advisors automate the boring and monotonous aspects of the investment industry, offering actionable investment options at a fragment of the normal cost. This diversifies your portfolio, putting it in efficient investments, custom tailoring it towards your personal risk tolerance. Robo advisors are a great option for investors, as many people are left in the dust or the poor house when hoping to have options for retirement.
If you are a novice investor, robo advisors help get your portfolio up and running, putting together a professional quality portfolio. It's a great value to investors interested in starting small, those previously unable to glean the help of professional investment advice. Such investors have mostly relied on word of mouth, lucky guesses, and friendly advice for investment help. Such methods can often be unreliable, as needs hardly be said.
Of course, robo advisors can also provide useful services to the more experienced investors, looking to capitalize on its cutting edge technology. Robo advisors can optimize your taxes and keep your execution fees low.
Tax Loss Harvesting with Robo Advisors
Robo advisors are constantly on guard, protecting your portfolio from paying too much takes. Many robo advising firms provide a Tax Harvesting strategy, letting you dodge any unnecessary taxes, an efficiency strategy that rivals the advice of the shrewdest investment advisors.
Tax loss harvesting defers taxes by selling the securities that currently run at a loss for a correlate asset with almost identical exposure. The loss is “harvested,” letting them set this against future taxes, while keeping the portfolio mixed.
This is a real headache if done manually, but the robo advisors keep the process running like a well oiled machine, letting you make the important investment decisions and letting the robots juggle your taxes. Betterment, one of the largest robo advisor firms, boast that their tax loss harvesting strategy can boost after-tax return revenue by 0.77% over the course of thirteen years.
Of course, this method of tax loss harvesting is not for everyone. It works well if you are offsetting capital gains tax or needing shelter for up to $3000 in income, but if, on the other hand, you are in a low tax bracket, so that you can realize capital gains tax free, or if you are investing in a tax sheltered account, obviously you wouldn't want to use a tax harvesting scheme. However, if you do benefit, these can save you quite a bit of money on your tax returns.
If you are expecting to earn a significant income in the future, you might also abandon the idea of using a tax harvesting scheme, because this could create more taxes at a later period of time. Keep up to date on your tax situation both today and tomorrow to make sure you make the right decision.
Pick The Robo Advisor That Is Right For You
Everyone has a different financial situation. In this light, robo advisors are not the right pick for everyone. Your own particular situation determines whether robo advising is the right pick for you, so make sure they will be useful to you when you reach the endgame of your financial goals. Just make sure you plan ahead your financial situation into the future to make sure you have the money that you need when you retire, or whatever else you might be needing these returns for in the future.
For novice or otherwise inexperienced investors, robo advisors offer a huge advantage. On the other hand, an investor further down the road might question the value of such advisors, especially if they believe robo advisors take too big of a bite out of their potential profit margin. If you are an independent investor looking to manage things yourself, you might not wish to pay Wealthfront 0.25% per year for a portfolio that you could simply gain from an existing index fund at a minimal fee.
Let's look at the following example. If an investor with a million dollar portfolio, investing with Wealthfront, would have to pay a management fee of $2,500 instead of $500 for a cheaper option like an index fund with Vanguard. That's just simply not worth the cost. Of course, there may be different circumstances, requiring one to figure out what will guarantee that a portfolio stays optimally balanced. Nevertheless, this cost differential is a factor worth considering when considering whether or not to use robo advisors for managing your investments.
The industry has many critics, several of whom like to point their fingers at the fee structure for robo advisors, which still rings true with Wall Street's former values. Those critiquing the industry point to the proportional fee structure, which makes investors pay more as their assets increase. Yet these arguments hold very little water, and most investors would pay any amount of money now for the promise of a possible increase later.
With time, of course, these fees accumulate, so slashing them would certainly cut down on the investment time. However, most investors just want this money to have grown significantly by the time they need it. Many use it for their retirement, and robo advisors provide a relatively decent option for such accounts. Of course, these automated advisors are not perfect, yet they they fill a niche in the investment market at present, catering to these specific needs quite aptly.
Criteria for Selecting a Robo Advisor
If after analyzing the advantages and disadvantages of robo advisors, you still want to put these automated systems in control of your assets, you need to find a robo advisor you can trust with your assets, one whose services are tailored towards your particular needs. It is always important to tailor robo advisors to your needs in this way or you could end up losing significant money that you could have otherwise saved.
Of course, browsing the archives filled with content and features for every firm is a arduous task, so we have decided to save you the trouble by setting up an easy to read comparison table. Simply fill in the relevant information to find the features that you feel fit your personal needs. Make sure you take into account things like minimum deposit, fees, tax loss harvesting, and perhaps, in case the automation fails to satisfy your investing needs, you might want a human advisor behind the curtain, just in case you wish to contact such an advisor.
Future of Robo Advising
Regardless of how you feel about the automatic systems taking over the investment advising world, the robo advisors have taken over and are here to stay. Offering a passive investment strategy at a low cost, these automated systems are quickly taking over, becoming the top pick for many investors looking to streamline their earnings, and millennials who like the low account minimums.
Bloomberg shows us some interesting data about this, insisting that ETFS and passively managed stock mutual funds have ended up with somewhere around $257 billion USD worth of assets as of 2015, which sharply contrasts with the $108 million USD from actively managed funds. The robo advisors have taken over roughly $50 billion worth of assets as of 2015, and their grip on these assets only continues to grow.
Without precedent, the takeover of these sectors knows no limits, and will likely continue its march across investment space into the future. Morgan Stanley, Wells Fargo, Bank of America, and other major banks are already hinting at launching their own robo investment systems, likely driving these fees even lower. This competition means that robo advisors will be even more viable, making human advisors less and less efficient as a means of managing your personal investments, making them economically no longer a viable alternative.
Why robo advisors are certainly controversial, they certainly are efficient. They introduce a new novice element into the market, something unprecedented and exciting. The old ways of paying human beings for advise are nigh over as automation takes over, sending them and their high fees to pack up their desks and kissing their valueless monthly or quarterly statements goodbye. Going forward, if advisors fail to add real value, they will have to make way for the robo advisors.
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