A robo-advisor is like a dating app matching you with your perfect portfolio. It helps you choose the portfolio that best matches your goal, risk tolerance, and timeline. It will suggest a portfolio and manage it for you by rebalancing it as it drifts from the target allocation. There is usually a fee associated with the use of the robo-advisor, in addition to the expense ratio of any ETFs. The fees are usually more expensive than managing an account yourself, but cheaper than paying a financial planner.
Portfolios
One of the most important parts of choosing a robo-advisor is the portfolios they offer. The fees are important, but if they types of portfolios they offer aren't a good fit, then it won't matter. Just because you are opting to let an algorithm manage your portfolio doens't mean you should let the algorithm blindly choose your portfolio. Have some idea of asset allocation you want and the risk level at which you are comfortable. For example, Schwab is a reputable brokerage and the robo-advisor is free. However, their robo-portfolios offer a large cash allocation - much larger than I would be comfortable with as an aggressive investor. Most of the websites allow you to see the different portfolios that are offered. Do some research before committing to a brokerage.
Access To Financial Planners
Some robo-advisors offer access to certified financial planners (CFPs) or coaches. The advisors are usually cheaper than paying a financial planner separately because they are using a robo-advisor to manage your account rather than choosing and managing investments themselves.
Tax Loss Harvesting
Some robo-advisors offer tax loss harvesting for taxable accounts. While there are varied opinions on whether tax loss harvesting is truly beneficial in the long run, I have included it in the table as it is important to some investors. Keep in mind that tax loss harvesting does not matter in tax-advantaged accounts such as IRAs or other retirement accounts because they are taxed as income when withdrawn at a later date rather than as capital gains.
Flat Fees vs Assets Under Management
The amount of money you have invested will play a role in whether you should consider a monthly flat fee model or an assets-under-management (percentage) model. Generally, the monthly flat fee model is best for those with high balances. If you have $5000 invested, a 0.25% fee will result in a total cost of $12.50 for the year, which is much less than the $60 annual fee you would pay with a $5/month fee. If you have $25,000 invested, the 0.25% fee will be $62.50 and the $60 flat fee option would be more advantageous. Be aware that some of the accounts charge a flat fee until you meet a certain balance or establish a direct deposit. As always, read the fine print and look for sign-up bonuses.
Robo-Advisors
For transparency, I have investment accounts at Schwab, SoFi, and Vanguard, but have not used their robo-advisors. Let's take a look at some robo-advisors that might be a good fit for you.
Updated 3/9/24. Fees may change.
Robo-Advisor | Fees | Minimum | Tax Loss Harvesting | Supported Accounts | Additional Features |
$0 | $5 | No | IRAs, Taxable | Access to free CFPs | |
$0 | $5000 | Yes | IRAs, Taxable, Trusts, Custodial | Large cash allocation, Monthly income tool for retirees | |
0.20% | $3000 | Yes | IRAs, Taxable | ||
0.25% | $10 | Yes | IRAs, Taxable, Trusts | CFP access for additional 0.15%, bucket system for multiple investment goals | |
0.25% | $500 | Yes | IRAs, Taxable, 529 Plans | Lots of investing options, bucket system for multiple investing goals | |
0.30% | $100 | No | IRAs, Taxable, Custodial | | |
0.30% | $500 | Yes | IRAs, Taxable, Custodial | | |
0%-0.35% | $10 | No | IRAs, Taxable, HSAs | Unlimited coaching after $25,000. |