How to Evaluate a Robo-Advisor

The advent of robo-advisors, aka online advisors, in recent years has upended the financial planning and wealth management worlds. If you're comfortable with counsel that's primarily dispensed digitally, then this course might be a good one for your needs. But how do you evaluate and decide which robo-advisor to use?

The first step is to determine what type(s) of financial advice and services you need. Most robo-advisors manage your money in one form or another. LearnVest is an exception: Their focus is on budgeting and financial planning, providing access to live help via the phone. While they make investment recommendations, they do not actually invest your funds.

For the most part, though, portfolio management and asset allocation are the staple services that robo-advisors provide. They do it via the use of an algorithm of some sort. Their investment vehicle of choice is usually exchange-traded funds (ETFs). Folio Investing offers a number of pre-set portfolios of stocks or ETFs that clients can buy as-is. Similarly, Motif Investing offers pre-done portfolios of 30 stocks for one price.

Above this basic level of service, several robo-advisors offer tax-loss harvesting services for portfolios that are not tax-advantaged in some way. Some specialize: For example, Rebalance IRA focuses on retirement accounts. Personal Capital, which offers the ability to manage all of your accounts on a consolidated basis, is aimed at a slightly more upscale market; to partake of its management services, investors need a minimum of $25,000. 

Just as there are variations in the services offered, there are variations in the fees charged. They generally range from 0.15% to 0.5% of the assets under management. Some advisors charge a one-time set-up fee as well.

LearnVest’s fees range from $89 to $399 for their initial review and then $19 per month after that. Personal Capital’s fees range from 0.49% to 0.89% of the amount invested.

Remember that the expense ratios of the underlying ETFs or mutual funds the advisors are investing in will apply as well. There might also be transaction costs for trading various investments.

The popularity of robo-advisors has not been lost on major players in the financial services industry. Fidelity Investments has forged an arrangement with Betterment, one of the oldest (founded 2008) robo-advisors; the human advisors on Fidelity’s team can offer a version of Betterment’s professional Registered Investment Advisor platform to their clients. Fidelity has inked a deal with LearnVest as well.

Vanguard has its own version of a low-cost robo-advisor, as does Charles Schwab Corp. Schwab Intelligent Portfolios raised a stir when it launched its no-fee service in 2017. Schwab plans to make money on the assets under management ($5,000 is the minimum portfolio size).

When considering robo-advisor, affiliations with major firms like Fidelity, Vanguard or Schwab might be something to consider. These companies have the money to invest and the time to allow these services to grow. Additionally, as your needs change or you desire a more personal touch, you will be positioned to transition seamlessly to other services offered by these firms.

If you’ve opted to go with a robo-advisor, you still have to consider which one best fits your needs as an investor. Factors to consider are the types of advice and service the robo-advisor offers, the level (if any) of human interaction offered, the minimum investment required and any fees or expenses that you will incur. The increasing interest of major financial services firms in this arena is a further consideration.

For related reading, see: Is an Online Financial Advisor Right for You? and Robo-Advisors: How to Pick the Best One for You.