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Throughout most of modern history, if you needed investment guidance, you had to hire a financial advisor. There are certainly benefits to having the advice of a seasoned professional, but there's one big drawback -- an investment advisor can be expensive.
Now there's an alternative option: robo-advisors.
As with any investment method, you should learn a few things about robo-advisors before you start investing your money. In this guide, we'll share our picks for the best robo-advisors and take you through the most important things you should know about investing with a robo-advisor.
Betterment offers a a wide array of investment services and account types, along with essential cash management features such as a high-yield cash account. Best yet, Betterment is now offering up to one year managed free.
$0 per trade, management fee 0.25%
$10
On Secure Website.
With a low fee structure, this to-the-point platform is a great option for investors with at least $3,000 to start.
0.20% all-in fee
$3,000
On Vanguard Digital Advisor®'s Secure Website.
With no management fee or account minimum, anyone can get started with SoFi Automated Investing.
$0 per trade, expense ratio 0.03%-0.08%
$1
On Secure Website.
With great access to customer service, low-cost investments, and automatic rebalancing, E*TRADE Core Portfolios is a great option for anyone with at least $500 to start investing.
$0 per trade, management fee 0.30%, expense ratio 0.06%-0.12%
$500
On E*TRADE Core Portfolios Secure Website.
With competitive pricing, low minimums, and features such as automatic rebalancing, Ally Invest Managed Portfolios is a great choice for anyone without a lot of cash to spend.
$0 per trade, management fee 0.30%, expense ratio 0.05%-0.20%
$100
On Secure Website.
Acorns takes a unique spin on the robo-advisor model by rounding up your purchases to invest that change into an automated investing strategy. Importantly, its costs are low, and it's a solid fit for people wanting to manage their investments and banking under one roof.
$1-$5 monthly
$0
On Acorns' Secure Website.
With a competitive management fee and no account minimum, this is a great broker for a variety of people. Their ability to factor in woman oriented financial issues is a unique plus!
0.25% management fee
$0
On Secure Website.
TD Ameritrade Essential Portfolios has a great portfolio selection and in-person help, but its high account minimum might be too steep for some investors.
$0 per trade, management fee 0.30%, expense ratio 0.06%-0.07%
$5,000
If you have a large account balance or are in a high tax bracket, Wealthfront could be great for you as tax-loss harvesting can result in significant savings.
$0 per trade, management fee 0.25%, expense ratio 0.05%-0.29%
$500
With perks like automatic rebalancing and tax-loss harvesting, this robo-advisor could be a great choice if you're looking to invest at least $5,000.
$0 per trade, $0 mgmt fee, 0.03% to 0.60% expense ratio
$5,000
Fidelity Go provides a simple, easy-to-understand pricing structure with access to financial planning tools and educational resources.
Free to 0.35% per year
$10
The standout perks include a modern app, capable robo-advisor, and banking in one. The inclusion of no management fee sweetens the pot.
$0 commissions and no management fee. 0.06%–0.20% fund expense ratio
$100
"Robo-advisor" refers to any investment platform that automates key components of investment planning that were traditionally handled by a human advisor. It can help you assess your risk tolerance, determine your investment time horizon and goals, and allocate and rebalance your portfolio to maximize return potential without too much risk.
Some investment apps use only robo-advisors, especially those geared toward micro-investing. Major online stock brokers tend to offer robo-advisors for free or low fees and provide access to human advisors for premium account holders.
Features and costs among robo-advisors vary significantly.
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The exact procedures and features depend on the specific robo-advisor, but generally speaking, here are the basic steps you can take to get started:
Costs vary among robo-advisors depending on their features and the types of investors they want to attract. Robo-advisors are known for having lower fees than their human counterparts, but it's still important to know how much you'll pay to use a robo-advisor.
There are two primary types of fees for most robo-advisors:
It's important to consider the combination of these fee types, often collectively referred to as the "all-in" cost of a robo-advisor. All-in costs typically range from 0.03% to 0.50%, but even at the higher end, this compares favorably to hiring a human financial advisor, which might cost 1% to 3% in management fees.
The fees discussed above may sound small, but don't underestimate the difference they make over the long run. The same way your money grows through compounding interest, that growth can be held back by compounding fees.
To illustrate this, let's say that you have $5,000 to invest and that you plan to add another $5,000 every year for the next 30 years. We'll say your portfolio achieves annual returns of 8% on average. Here's how you'd fare with these all-in fees:
VALUE AFTER | 0.25% ALL-IN FEE | 0.50% ALL-IN FEE | 1.00% ALL-IN FEE |
---|---|---|---|
10 Years | $71,579 | $70,735 | $69,082 |
20 Years | $222,571 | $216,523 | $204,978 |
30 Years | $541,085 | $516,997 | $472,304 |
Short-term, the difference a fee makes is quite small. But over the long run, those seemingly small differences in fees make a big difference to your bottom line.
After 30 years, your hypothetical investment would have earned nearly $69,000 more by using a low-cost robo-advisor with a 0.25% all-in fee rather than a typical human financial planner with a 1% management fee.
Some key features are available through almost any robo-advisor, while other interesting perks aren't quite as common. Here are the main features you should pay attention to as you search for the best robo-advisor for your financial goals.
Robo-advisors are generally far cheaper than their human counterparts, but they aren't all equally cheap. There's quite a bit of variation in management fees and expense ratios.
A quick look at our best robo-advisor picks shows management fees ranging from 0% to 0.35%. Many offer tiered pricing, so you can opt into a no-frills version or a premium product, depending on what you want to pay and which features you need.
A deposit requirement could be a major limiting factor if you're just getting started or have limited funds available to invest.
Most robo-advisors come with far lower minimum deposit requirements than traditional brokerages, but the requirements vary a lot. Some let you open an account with as little as $1, and some require a minimum opening deposit of $500 or more.
Generally, the minimum deposit requirement aligns with the investment goals the app is designed to help you achieve.
If you just want to play in the stock market to see what it's all about, a micro investment app can help you get started for $5. If you want to seriously stash away money to diversify your retirement savings, a more advanced robo-advisor with a $500 minimum is more likely to offer the features you need.
When you set up an investment portfolio through a robo-advisor, your initial investment allocations will be aligned with your risk tolerance and investment goals. For a simplified example, your robo-advisor might determine that your ideal allocation is 70% invested in stocks and 30% in bonds.
Over time, those stocks and bonds shift in value, so your allocation shifts, too. A strong year for the stock market could push your portfolio to 80% stocks -- which puts it at a higher risk in case of a down year.
Automatic rebalancing solves this problem by periodically reviewing your portfolio and moving money into different types of investments to maintain your target balance between risk and reward.
Automatic rebalancing is a fairly standard feature among robo-advisors, but the frequency varies among platforms.
Some robo-advisors incorporate strategies to reduce your tax bill into their portfolios, and the most important to know about is tax-loss harvesting.
Here's the short version of how tax-loss harvesting works with a robo-advisor: Let's say that your robo-advisor constructed your portfolio using five investment funds. We'll also say that over the next few months, four of the funds perform very well, and one declines in value. In the course of rebalancing, your robo-advisor will likely sell some of the high-performing funds.
This can create a taxable capital gain. Some robo-advisors actively combat this by strategically selling investments that have declined in value. That offsets your capital gains (because they sell at a loss), and they can re-invest the remaining capital.
Tax-loss harvesting is most important if you invest large amounts or you're already in a high tax bracket. It's only a concern if you're investing in a taxable account, not tax-advantaged accounts like retirement plans.
By definition, the purpose of a robo-advisor is to take the human element mostly out of the equation. And most of what a human investment advisor can do can be automated rather easily. Plus, robo-advisors remove the hassle of finding a financial advisor.
However, there are some instances where it can be valuable to have access to a human financial advisor. For example, if you're planning to buy a home in a few years or you want to start saving for college, a financial advisor can point you in the right direction.
Some robo-advisors eschew human advisors altogether, but some give you access with a premium membership or for a set fee per consultation.
All robo-advisors offer some type of account support, though the level varies a lot. You might only be able to chat with customer service through messages in the app, on their website, or through email. Some hold customer service hours with agents available via phone. Look into those details before choosing an advisor if one-on-one support is important to you.
It's not practical to list every possible feature a robo-advisor could offer or that might matter to you in particular. But it's worth noting that some of our favorite robo-advisors offer features that go beyond the standard list we've discussed. To name a few:
There aren't any official "types" of robo advisors, but the idea of each kind is generally the same -- a robo-advisor will take your investment capital and create a portfolio that is appropriate for your age, goals, and risk tolerance. That said, I would divide robo-advisors into three general categories:
Robo-advisors are most appropriate for investors who fit into one or more of the following groups:
The short answer is that you should choose the robo-advisor that has features that are the best fit for you. There's no such thing as a financial account that is a perfect fit for everyone (and if there is, we haven't found it).
Here are few things to look for:
A good place to start is with our best robo-advisor picks. You can also check out a few of our reviews and see which looks like the best fit for you.
Broker/Advisor | Best For | Commissions | Next Steps | |
---|---|---|---|---|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Beginners |
Commission:
$0 per trade, management fee 0.25% |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Low fees and low account minimums |
Commission:
0.20% all-in fee |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Financial advice |
Commission:
$0 per trade, expense ratio 0.03%-0.08% |
|
![]()
Rating image, 4.0 out of 5 stars.
|
Rating image, 4.0 out of 5 stars.
|
Best For:
Socially responsible investing |
Commission:
$0 per trade, management fee 0.30%, expense ratio 0.06%-0.12% |
|
![]()
Rating image, 4.0 out of 5 stars.
|
Rating image, 4.0 out of 5 stars.
|
Best For:
Conservative investors |
Commission:
$0 per trade, management fee 0.30%, expense ratio 0.05%-0.20% |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Rounding up your purchases to invest |
Commission:
$1-$5 monthly |
|
![]()
Rating image, 4.0 out of 5 stars.
|
Rating image, 4.0 out of 5 stars.
|
Best For:
Women |
Commission:
0.25% management fee |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Lowering taxes |
Commission:
$0 per trade, management fee 0.30%, expense ratio 0.06%-0.07% |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Lowering taxes |
Commission:
$0 per trade, management fee 0.25%, expense ratio 0.05%-0.29% |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Larger accounts |
Commission:
$0 per trade, $0 mgmt fee, 0.03% to 0.60% expense ratio |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Minimum balance |
Commission:
Free to 0.35% per year |
|
![]()
Rating image, 4.5 out of 5 stars.
|
Rating image, 4.5 out of 5 stars.
|
Best For:
Investing and banking in one |
Commission:
$0 commissions and no management fee. 0.06%–0.20% fund expense ratio |
Robo-advisors automate certain components of the investment planning process. A robo-advisor can assess your risk tolerance, determine your investment time horizon and goals, and allocate your investment portfolio to maximize return potential without too much risk.
Yes, most robo-advisors charge a small management fee as a percentage of client assets expressed on an annual basis. And all robo-advisors expose investors to fees charged by the underlying investment funds they use.
As with any investment product, investments offered through a robo-advisor can lose value. However, if you aren't an experienced investor, using a robo-advisor is likely a safer move than trying to choose a portfolio of stock and bond investments on your own. Money you invest with a robo-advisor should be SIPC-insured, like any other investment.
"Online brokerage" is a broad term that refers to any financial firm that facilitates the purchase of investment vehicles like stocks, bonds, ETFs and mutual funds. "Robo-advisor" refers to a specific type of online brokerage account that chooses and maintains an investment portfolio automatically on behalf of clients.
The minimum amount of money required to get started varies, but many robo advisors don't have any minimums at all. You can literally get started investing with $1 in some cases.
Many are designed to match or beat the market, but it's not a sure thing. For example, most robo-advisors offer a selection of passive investment funds that are designed to match the performance of certain benchmark indices over time (say, the S&P 500). And some offer actively managed fund options that have the goal of beating the market, but there's no guarantee they'll actually do so.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Vanguard disclosures
Visit vanguard.com to obtain a prospectus or, if available, a summary prospectus, for Vanguard and non-Vanguard funds offered through Vanguard Brokerage Services. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
Options are a leveraged investment and are not suitable for every investor. Options involve risk, including the possibility that you could lose more money than you invest. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. A copy of this booklet is available at theocc.com. It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (888-678-4667 or 888-OPTIONS). The booklet contains information on options issued by OCC. It is intended for educational purposes. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit optionseducation.org for more information. The OIC can provide you with balanced options education and tools to assist you with your options questions and trading.
Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee. See the HYPERLINK "https://investor.vanguard.com/investing/transaction-fees-commissions/etfs" Vanguard Brokerage Services commission and fee schedules for full details.
Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC.
Vanguard Marketing Corporation, Distributor of the Vanguard Funds
Betterment disclaimers
†Betterment Cash Reserve ("Cash Reserve") is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients' funds are deposited into one or more banks ("Program Banks") where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.
Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC's Form ADV Part II.
**The annual percentage yield ("APY") on the deposit balances in Betterment Cash Reserve ("Cash Reserve") is 1.60% and represents the weighted average of the APY on deposit balances at the banks participating in Cash Reserve (the "Program Banks") and is current as of August 01, 2022. This APY is variable and subject to change daily. Deposit balances are not allocated equally among the participating Program Banks. A minimum deposit of $10 is required, but there is no minimum balance required to be maintained. The APY available to a customer may be lower if that customer designates a bank or banks as ineligible to receive deposits. APY applies only to Cash Reserve and does not apply to checking accounts held through Betterment Checking. Cash Reserve and Betterment Checking are separate offerings and are not linked accounts.
For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.
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