Free Robo Advisors
Are free robo advisors worth considering? Since we are always taught that you get what you pay for, most people will look at services offering anything for free with scepticism and doubt. However, in the financial technology market, free can actually offer great value and is worth considering as investors.
Robo advisors are companies that have married technology with financial advice to offer investors fully automated portfolio management services at a fraction of the cost of traditional investment management firms. In some cases, the fees are greatly reduced and the hurdle for getting this professional level of service is way lower than it was in the past.
In this post, we are going to look at free robo advisors and discuss the things you should consider when investigating where to invest your money.
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Are Free Robo Advisors Really Free?
When you hear the term “free” with respect to robo advisors, that is a bit of a misnomer. There are actually no free robo advisors as there are always fees paid to either the advisor or the exchange traded funds (ETFs) that the robo advisors use.
Exchange traded funds always have a management fee associated with them, albeit much lower than traditional mutual funds. This management fee is usually referred to as a Management Expense Ratio (MER), and can be best described as follows:
The percentage of a fund’s average net assets paid out of the fund each year to cover the day-to-day and fixed costs of managing the fund. The figure is reported in the Fund’s annual management report of fund performance. MER includes all management fees and [taxes] paid by the fund for the period, including fees paid indirectly as a result of holding other ETFs.
Blended within the Management Expense ratio are the operating expenses and management fees. Operating expenses are general expenses that are required to run the fund like fees associated with complying with regulations. Management fees are the costs associated with paying the custodian and valuation agents, registrar and transfer agents, and any other service providers retained by the manager. These are all costs that need to be paid by the ETF, which the ETF covers by charging an MER.
The real kicker is that ETFs are able to charge a much smaller management expense ratio. The average MER for funds offered by free robo advisors is around 0.10%, with some being as low as 0.05%. When compared to mutual funds or other more actively management investment, the difference is staggering. The average MER for these types of actively management funds is between 1.00% and 2.50%. That is almost a twelve times difference.
So, are there any true free robo advisors? Not really, due to the MER charged on the ETFs that these services use. However, the fees charged are much lower.
Account Opening Limits – As Low As Zero!
Where robo advisors differ is with respect to the minimum amounts required to open an account. There are some robo advisors that have no minimum requirements to open an account, and some that have limits. Even those with limits can be smaller, however they do require some level of initial investment to completely open an account.
When we talk about free robo advisors then, we are referring to the zero minimum investment required to open an account.
The next logical question is what to look for in a free robo advisor. Let’s have a look at the things you should consider when evaluating these specific types of robo advisors.
What To Look for In A Free Robo Advisor?
When reviewing robo advisor services, we look at the same criteria to determine how good they are. The same criteria we use for robo advisors that have a minimum investment level is exactly the same as we use for free robo advisors.
Here are the criteria we use, with a description of each. You should also consider these criteria when you do your own research.
Low cost: As discussed, there are always some sort of fees for charged for using a robo advisor. These fees are often in the form of management expense ratios that the exchange traded funds charge. Exchange traded funds fees are usually invisible to the customer; they are automatically taken by the fund as opposed to being paid directly by the client. With free robo advisors, you want to make sure the fees are at least the same, or lower, than robo advisors that do have a minimum investment level.
Solid Portfolios: Even with free robo advisors, the portfolio and the performance of the asset allocation is the most important element (with fees being almost a tie). If the robo advisor does not set up and manage their portfolios well, then the performance will be sub-optimal. When evaluating free robo advisors, you need to make sure they are using Modern Portfolio Theory as a guide, and that each robo advisor provides access to well-researched and efficient portfolios that offer a good balance between risk and reward.
Remove Decision Making: Free robo advisors should do all the ongoing management of the portfolio for the investor, with little to no opportunity for emotional decision making. Poor emotional decisions can have a negative impact on portfolio performance and investors often buy and sell investments at exactly the wrong times. A good robo advisor takes away the decision making choice and automates these decisions for you so you do not have the opportunity to do anything hurtful to your portfolio.
24/7 Access Via Digital Tools: Free robo advisors should take advantage of all available technologies to provide investors with online platforms to provide full access to their portfolios and tools to help them be better investors. Even the robo advisors with free minimum investments are able to offer these services, and should be considered when making the decision to sign up with their services.
Tax-Efficient: Tax efficient investment opportunities can help to maximise the long term performance of the robo advisor’s portfolios. Free robo advisors can also offer this service, so if you are investing in a taxable account, finding a company with a tax harvesting or tax minimisation offering is a positive.
Personalised Advice: Some free robo advisors even offer personalised advice based on the client’s individual needs. Still leveraging technology and lower fees, they can now provide access to a human being who can help with the more complicated requirements of some investors.
Easy Sign-Up and Paperless: The most advanced robo advisors do everything completely online, including signatures during sign up. This saves paper, is environmentally friendly, and very easy to do.
When evaluating free robo advisors, the final area to review is the extra fees that may be charged by the various services. For example, in order to provide a more low cost offering, the free robo advisor may charge higher fees if the investor decides to withdraw money from the service.
All robo advisors provide immediate access to funds, however some will charge a fee to withdraw funds from the account. This fee is added to offset the added transactional costs required to sell the exchange traded funds the investor holds in their account and send the money to the investor.
Other fees may be additional charges when seeking out additional human support. As robo advisors build their model around technology, they want to minimise the amount of staff they have. As such, if personalised service is required, then they will charge extra for that.
List of Fee Robo Advisors
There are a number of different free robo advisors available globally. We have prepared a list of these free robo advisors; the companies that require little to no minimum investment when opening an account.
Next Steps: Free Robo Advisors
As an investor looking for low to no minimum investments, the table provided highlights a number of the most popular free robo advisors available globally. In order to further narrow down this list to the right service for you, start by looking at the options available in your country and check out the more detailed reviews available on this site.
Armed with that information, you will be in a good position to choose the best alternative for you and your money.