Robo-advisors are growing increasingly popular, especially with Millennial and Gen Z investors, as an alternative to traditional portfolio management. But not all robo-advisors are created equal.
Robo-advisor—an automated investment platform that uses computer algorithms to invest your money for you—is certainly a hot buzzword in today’s economic landscape (perhaps second to only cryptocurrency). Don’t be lured in by the charm of the first robo-advisor you find.
If you’re ready to jump on the bandwagon, review our list of the best robo-advisors of 2021 to choose a quality option that meets your needs.
8 Best Robo-Advisors of 2021
Ease of Use
SoFi Automated Investing
Vanguard Digital Advisor
Charles Schwab Intelligent Portfolios
Large accounts, low fees
Experienced investors ss
Free access to advisors
Tax-loss harvesting, auto rebalancing
You can use Wealthfront to invest for retirement (Traditional and Roth IRAs, SEP IRA, 401(k) rollover), education (529 college savings plan) and general investing (Individual Accounts, Joint Accounts, Trust Accounts).
While the beauty of automated investment services is that the robot does everything for you, Wealthfront has a team of financial planners available who can talk through any questions you have.
Wealthfront also offers a cash account to make investing easier.
Betterment, the first robo-advisor to enter the market back in 2008, offers socially responsible investing, as well as checking and cash reserve accounts. Its mobile app is perhaps the best one on the market.
You can trust that you’re in good hands with Betterment. They manage $32 billion (with a B) in assets for more than 650,000 customers.
Betterment is currently running a promotion: Sign up now and get one year of free account management.
SoFi Automated Investing
Easy to set goals
Free access to human advisors
Another nice perk of SoFi is free access to certified financial planners. But investment options are generally more limited, i.e., there’s no comprehensive financial plan.
SoFi’s expense ratio is waived until June 2022. After that, it jumps to 0.19% — much more than the typical .03% for a Vanguard S&P 500 fund.
Vanguard Digital Advisor
Great retirement planning
Proven track record
Vanguard’s platform isn’t as simple as some, but if you’re interested in decades of data rather than a pretty app, Vanguard may be right for you. You can talk with investment professionals through its Vanguard Personal Advisor Services.
Beginners will appreciate Ally because of its leading mobile app, the $100 minimum deposit, 24/7 free live support and easy portfolio choices. The choices include Core (best for hands-off investors), Income (lower risk), Tax Optimized (tax-advantaged investments) and Socially Responsible (eco-friendly companies).
Ally can be a one-stop shop for all your financial needs. Ally Bank is a highly recommended online bank with high-yield savings and interest-earning checking accounts. Ally also offers CDs, money market accounts and mortgage, auto and personal loans.
Another highlight: It takes just 10 minutes to get set up.
Charles Schwab Intelligent Portfolios
Low expense ratios
Schwab’s robo-advisor charges no management fee. The company makes its money off the expense ratio for Schwab ETFs. Like other robo advisors, this one includes auto rebalancing and tax loss harvesting.
Low expense ratios
With M1, auto rebalancing stays on top of your investments with built-in tax efficiency. You can set up taxable investment accounts, as well as retirement accounts.
There is no management fee, though you will pay an expense ratio for trades. In addition, you can upgrade to M1 Plus (free for the first year, $125 thereafter), which includes 2% loans through M1 Borrow, two trade windows, custodial accounts and smart transfers.
With M1 Finance investment accounts, you can set up individual and joint taxable accounts, as well as retirement accounts like Roth, traditional and SEP IRAs. It also offers trust accounts.
To get the most out of M1 Finance, don’t just open an Invest account. Consider Borrow and Spend to unlock the full suite of features.
Acorns pricing structure is different from other automated advisors. That’s good because 1) it’s cheap and 2) it’s consistent. Other services charge a fee as a percentage of assets under management, so the management fee can fluctuate.
The downside is, most people who start with Acorns aren’t investing a lot, so they’re actually spending more ($36 a year) than they would if they invested with a robo-advisor platform that charges a 0.25% fee. In fact, an investor wouldn’t own $36/year with a robo-advisor charging 0.25% until they hit nearly $15,000.
Acorns invests your funds into diversified ETFs and performs automatic portfolio rebalancing. As with other robo investment services, you only need to answer a few questions for it to make the tough decisions for you
Acorns also allows fractional shares, which is a cool feature that lets you own a fraction of stocks with a high price per share.
As part of its investment portfolio, Acorns includes traditional retirement accounts. In addition to investing, Acorns offers a checking account insured by the FDIC. (No savings account, however.)
Best Robo-Advisor Honorable Mentions
While these automated investment platforms didn’t make our list of the eight top robo-advisors, they are also worth your consideration:
SigFig: Good for access to human financial advisors
Ellevest: Good for goal-driven investing
TD Ameritrade: Good for traditional investors
Interactive Advisors: Good for socially responsible investments
E*TRADE: Good for mobile investing
In addition, Personal Capital is often referred to as a robo-advisor, but they prefer to brand themselves as a “digital wealth manager.” Splitting hairs? Maybe. Either way, it’s a great platform if you can afford the $100,000 minimum account balance, which makes them more like traditional advisors.
Hallmark Features of the Best Robo-Advisors
What should you look for in a robo-advisor? Here are just some of the top features that the best robo-advisors offer:
Automatic rebalancing of the investment portfolio is a key feature of top robo-advisors. Some do this in real time while others do it on a schedule, like once a quarter.
The best automated investment companies should give you access to their platform for a small management fee. Look for one with a management fee between 0.25% and 0.40%. Anything higher, and you might as well pay a human investment advisor.
Some robo-advisors don’t charge a management fee at all, but remember: Nothing is free. They likely have expense ratios to consider.
Low Account Minimum
The barrier for opening traditional investment accounts with a human financial advisor is challenging for beginners to overcome. Many require tens of thousands of dollars to get started. If you are a beginner, look for a robo-advisor with a low or no account minimum.
Diversified Investment Portfolio
Some robo-advisors only invest in their own ETFs. While not inherently bad, we recommend options with more investment options, including multiple ETFs, mutual funds and even real estate investment trusts (REITs).
Most robo-advisors offer retirement investments, income investments and additional services. Find one that suits all of your investment goals.
This essential strategy involves selling off poorly performing investments at a loss to offset capital gains on other investments. A lot of the automated investment advisors with free account management don’t offer this, even some on this list. If free account management outweighs tax efficiency for you, that’s something to consider.
Access to Human Advisors
Whether free or at a low cost, a good robo-advisor will get you access to a human for investment advice and financial planning. Free financial planning is an obvious plus.
An Easy-to-Use Platform with Educational Tools
Look for a robo-advisor with a great mobile app and desktop platform. You should be able to easily find educational resources about personal finance and investment strategy.
Other Banking Services
Some automated investment advisors offer additional services with their brokerage account, as part of a full-suite online bank. If you want a checking and savings account along with your investment account, find a robo-advisor that offers this.
Pros and Cons of Using a Robo-Advisor
There are several advantages to using a robo-advisor, but they are not for everyone. They also have some pitfalls that serious investors should consider.
Here are some of the top benefits of using automated investment services:
You’ll save money. Robo-advisors are significantly cheaper than traditional human financial advisors.
You have around-the-clock access. While financial planning with a real person has its perks, you are limited to their operating hours. With a robo-advisor, you have 24/7 access to make changes and review your portfolio.
Lower account minimum. The account minimums are much lower than traditional brokerage accounts. Some robo-advisors have $0 account minimums.
They’re great for beginners. Robo-advisors do all the work for you, so even if you have limited knowledge, you can feel good about your investments. Definitely make use of their educational resources, however.
Robo-advisors are safe. Just like a traditional financial advisor, a robo-advisor must register with the US Securities and Exchange Commision (SEC).
There are some pitfalls of using a robo-advisor
Limited investment options. A robo-advisor typically gives you little control over how your money is invested and typically offers a smaller set of portfolio options.
Limited services. If you need help with something like estate planning or trust administration, you’re better off with a human financial planner. A robo-advisor is meant for basic investment services.
No growth in financial literacy. When you let a robot do all the work for you, it can be hard to be motivated to learn for yourself. However, it is important that investors at any level feel empowered to understand how their money is invested.
Frequently Asked Questions About Robo-Advisors
Have questions? We’ve got answers!
What Is a Robo-Advisor?
A robo-advisor is an automated investment platform that relies on computer algorithms to determine the best way to invest your funds, based on your answers to a questionnaire regarding risk tolerance, financial goals, time horizon and more.
How Does a Robo-Advisor Work?
Robo-advisors rely on proprietary software that real-life financial advisors use as well. To determine the proper asset allocation, they utilize information you provide on how you want to invest.
How Should I Choose a Robo-Advisor?
Think about the features that are most important to you. To get started, look at our list of the eight best robo-advisors and choose the one that is rated for your specific need (for example, micro-investing or mobile investing).
How Much Do Robo-Advisors Cost?
Robo-advisor fees vary. Some charge a very low percentage of assets under management while others rely on expense ratios for their own funds. Overall, they charge much less than traditional investment professionals.
Which Robo-Advisor Has the Best Returns?
This also varies, depending on how funds are invested and how the market is doing. Most robo-advisors perform similarly. Choosing the right one is more about the features and pricing that are right for you.
Which Robo-Advisor Should I Use?
This depends entirely on your preference. Think about the fees you’re comfortable paying, the maximum investment you can afford to make and the features that meet your needs.
Do Robo-Advisors Beat the Market?
Robo-advisors perform similarly to other brokerage accounts. Performance varies depending on the state of the market and the diversification of the investment portfolio. It also depends on how aggressive you have indicated you want your portfolio to be.
Timothy Moore is a contributor to The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.