Robo advisors were created to do two things. First, they were introduced to provide professional level portfolio management for people who traditionally didn’t have access to well researched, academically sound investment expertise.
Second, they were also introduced to provide that professional level of portfolio management at a fee level that is much lower than traditional investment managers. The combination of professional advice, at low fees is the key benefits that robo advisors offer.
Over the past few years, there has been a real proliferation of new robo advisor firms hitting the market. In addition, the more traditional investment management firms have also started to get into the game, complementing their human touch model with complex algorithms that can automatically build solid portfolios.
So, with all of the available options now available, how do you pick the best robo advisor? In this article, we are going to discuss the various items you should consider when deciding on which robo advisor to choose as your investment platform.
Before that however, let’s review some of the biggest names in the industry.
Overview of the Biggest Robo Advisors Available
Before we dive into how to pick the best robo advisor, we want to start by giving you a high-level overview of some of the biggest robo advisors available in the United Kingdom, Germany, and the United States.
Here is a summary of the following features of various robo advisors:
• Model: The type of model is either Automated or Hybrid.
o An automated model is robo advisors who provide investment portfolios completely online, with little to no human interaction. In other words, clients do not get access to a human investment advisor to help them.
o A hybrid model combines the fully automated portfolio management with the ability to work with an investment advisor on specific financial planning topics like tax management, estate planning, and/or goal setting.
• Fee Overview: Fee structures can vary quite a bit between robo advisor firms, and we have provided an overview of the major fees charged by each company.
• Account Minimum: This is the amount of initial investment required to open an account. Some firms have a $0 minimum investment, while others have a much steeper $50,000 minimum. Depending on your financial situation, this may be an especially important criterion to consider when deciding on the robo advisor you want to go with.
• Assets Under Management: Assets under management, or AuM, is the total value of all the accounts the robo advisor looks after for its customers. This is not a critical factor; however you want to make sure the firm is big enough so that they will be able to survive in this competitive market. It also will tell you which are the more popular services. The logic here is that if they are able to attract a high level of AuM, then they must be providing a solid service and are therefore worth considering.
• Location: The location is the region where the robo advisor is available to residents. Very few robo advisors are open to all customers, and are instead only registered to take on clients in the region they operate from.
Here at RoboAdvisors.com, we try to use a consistent approach when evaluating robo advisors. Although some of our reviews will differ, we also evaluate the services offered based on a number of key factors.
We feel that these factors are the most important considerations when comparing firms. Each firm will have their own take and market positioning on each of the criteria, however it is these factors that will ultimately determine how well the robo advisors are able to meet your needs. Here are the criteria we use to evaluate each company, and we would encourage you to use something similar.
Minimum Deposit Amount The minimum deposit amount is what is required to get an account started with a robo advisor.
Different companies offer different minimums to get started. Some require nothing to open an account, while others take a larger investment. For example, Vanguard requires $50,000 to get started while Munnypot requires a £1000 initial deposit or £100 per month if the investor set up an automatic purchase plan.
Asset / Portfolio Allocation: Robo advisors all have slightly different approaches t how they build their portfolios. When evaluating them, we want to make sure their methods are based on research the portfolios are well diversified.
In addition, there should be different portfolios for the different levels of risk, time horizon, and goals people are investing for.
Annual Fees / Management Fees: This may be the most important criteria. The best investment performance starts with low fees, and we want to see robo advisors offering some of the lowest fees in the industry.
You should be able to justify why you would go with a robo advisor that does not offer among the cheapest fee structures available.
100% Robotic Versus Additional Human Assistance: In some cases, robo-advisors are 100% automated with little to no human support available for unique circumstances.
Alternatively, there are some robo-advisors that offer their services as primarily robotic, with the option of getting advice from a human.
Potential clients need to consider what their needs and comfort levels are with robo-advisors, to determine which mix will work best for them.
Account Types: Available In the United Kingdom alone, there are multiple account types investors can choose. For example, investors may require one or all of a general investment account (taxable account), a Stocks & Shares Investment Share Account (non-taxable), or a Cash Investment Share Account.
In the U.S., account types the investor may require an individual, joint, IRA, and/or a 401(k) plan. Making sure the robo-advisor has the right account for you is an important consideration.
Online Security: Online security is getting more and more important as hackers and other nefarious individuals look for holes to exploit information.
As robo advisors are taking accountability for your hard-earned money, you want to make sure that the security protocols are well designed.
You will know this by looking for robo advisors using bank-level security measures and where your money is held separately in an account with your name on it at a custodian, usually a large well-known bank.
Other Services Robo advisors need to differentiate themselves to stand out, just like any other company. As a result, they build out their quiver of online tools that can either be very valuable to investors, or nothing more than a gimmick designed to show value, without delivering it.
One of the more valuable services robo advisors may offer is tax loss harvesting.
When evaluating robo advisors it is important to consider the other tools and services available to you, and determine if they are important in your decision to invest with them.
After going to each robo advisor’s site to learn how they work, and checking for online reviews like the ones available here at RoboAdvisors.com there is one final step every potential investor should consider doing.
Actually signing up for their top two or three picks. Open accounts with each of these sites so you an fully evaluate the process. Even if the robo advisor requires a minimum deposit, you can still sign up and get a solid feel for how the service works, how their customer service works, and what the portfolios may actually look like based on your needs.
I have done just that in the past. In fact, with a firm that included a $0 minimum investment, I put in a whopping $20 into robo advisor WealthSimple to see if I liked it. I am glad to say it worked, but I would not have continued with them had I not signed up and went through the whole process. Here is what my account looks like with this $20 invested (glad to say my portfolio is making money, however as a long-term investor short-term gains do not affect me!):
This added research done by you will go a long way to tell you if you are going to be comfortable using the service for years to come. In fact, ideally you will be investing with your chosen robo advisor for multiple decades. As such, it is not a decision you should take lightly and should spend the time to do this final step before actually committing more of your hard-earned money.
So what now? Our recommendation is to go through each of the reviews provided on RoboAdvisors.com to see how they fare using our standard criteria. Whittle down the robo advisors you are interested into two providers, or maybe three if you can’t decide. With that list, simply start the process of signing up. If they require very low minimums invest a small amount of money with them to experience their entire sign-up and investment process. With that information, you will be able to determine which service you like best, and then commit to them with all your investment dollars going forward.
For the services you decide not to continue with, you can simply transfer the funds to your chosen robo advisor and let all of that money go to work for you.