For our 2017 Robo-Advisor Review we assessed, rated, and ranked eight different firms. Instead of relying on website information and marketing materials as most editorials do, we opened and funded an account with each robo-advisor to acquire a true client experience. Learn more.
A robo-advisor is a digital first, algorithmic driven investment advisor. While a formal advisory service uses humans to construct a diversified portfolio and provide financial advice, a robo-advisor relies on technology, algorithms, and academic portfolio theory to construct and maintain a diversified portfolio.
This guide will introduce investors to robo-advisors and their current role in the investment world. I will conclude with our ranking of the best robo-advisors in 2017.
Robo-Advisor Pros and Cons
By removing the human component and using low-cost index exchange traded funds (ETFs), investors can cut their annual fees by over half. The average investment advisor in the US charges a management fee of around 1% (of total portfolio assets) per year, whereas robo-advisors charge around 0.30%. Thanks to the power of compounded returns, these annual savings, which are invested in the portfolio, turn into significantly higher returns for the investor.
Herein lies the trade-off though. Talk to a Certified Financial Planner (CFP) and he will be quick to note that building a diversified portfolio is not the challenge; instead, it is navigating your own mind. Human psychology is complex, and we are all subject to a slew of investor biases; for example, selling during a market downturn instead of staying the course, which can have dire consequences for our financial future.
To instill confidence, robo-advisors provide a variety of tools to facilitate goal setting and long-term portfolio management. For a breakdown of robo-advisor tools, read our full length robo-advisor reviews.
Signing Up for a Robo-Advisor
To sign up with a robo-advisor, first you fill out your investor profile (age, income, goals), then complete a risk-tolerance questionnaire (our research found the average questionnaire incorporates two or three questions). The data you submit is compiled to determine a “risk score” that determines a recommended portfolio. Portfolios fall within three primary buckets based on your risk score: conservative, moderate, and aggressive.
If everything looks good, you then complete an application, open the account, and deposit funds. Once your account is up and running, you can use a variety of tools to monitor your portfolio and track the progress of your goals over time. While robo-advisors can be used for any goals, from saving for a house to saving for your kids’ college education, they are used primarily to save for retirement.
Is a Robo-Advisor Right for You?
If you are currently disciplined in managing your personal finances, keeping a consistent budget, and have a fundamental understanding that over time the stock market will rise and fall, then a robo-advisor may be a good fit. You will be able to fully appreciate the retirement and goal-planning tools provided to you, which will enhance your financial prowess.
On the contrary, if you are uncomfortable with the stock market and periods of financial uncertainly, such as bear markets, then a robo-advisor may not be an appropriate choice for you. While goal-planning tools and risk-tolerance questionnaires help encourage staying on course, you ultimately have control of the reins. This means you will have the ability to log in at any time and change your risk tolerance, which in turn will completely shift your portfolio holdings or encourage you to close the account altogether.
Fortunately for all investors, the robo-advisor space is evolving at a very fast pace. Competition has yielded a variety of new entrants in the past year, each with their own take on goal planning on portfolio construction. Furthermore, several robo-advisors have launched or are in the process of launching, optional upgrades to access low-cost human advice.
Best Robo-Advisors: 2017 Ranking
After opening, funding, and testing accounts with eight different robo-advisors, here is our list of the best robo-advisors of 2017.