There are some features that almost all robo-advisors offer, and others that aren’t quite as common. With that in mind, here’s a list of what you should pay attention to as you research robo-advisors to find the best fit for you:
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, as well as the fees charged by the underlying investment funds.
A quick look at our best robo-advisor picks shows management fees ranging from nothing at all to 0.35%. And some have multiple tiers, such as a no-frills version and a premium product that costs more. Expenses of the underlying investment funds can vary dramatically as well.
With that in mind, it’s smart to look at fees as just one piece of the puzzle. If a certain more expensive robo-advisor offers more of the features that matter most to you, it can still be a good value for you.
Minimum deposit requirements
Obviously, this isn’t much of an issue if you have tens of thousands of dollars or more to invest, but it can be a major limiting factor for investors who are just starting.
Most of our favorite robo-advisors don’t have formal minimum initial deposits, and some will even let you get started for $1. On the other hand, there are some with minimum investments in the thousands, so keep this in mind as you conduct your search.
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.
The problem is that over time, this won’t stay the same all by itself. If the stock market has a particularly strong year, for example, you could find that your portfolio is now 80% stocks. Automatic rebalancing solves this problem by periodically reviewing your portfolio and making adjustments to maintain your desired risk/reward profile.
This has become a pretty standard feature among robo-advisors, but it’s still worth mentioning. The frequency of rebalancing can vary between firms.
Some robo-advisors incorporate tax efficiency strategies 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 to offset your taxable gains, and then re-investing that capital in a tax-efficient manner.
This is likely to be more important if you have a large investment account, or you’re otherwise in a high tax bracket. If taxes are a top concern, be sure to confirm whether your robo-advisor offers tax-loss harvesting.
Access to human financial advisors
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 (portfolio allocation, rebalancing, etc.) can be automated rather easily. Not to mention that finding a financial advisor can be a hassle.
However, there are some instances where it can be valuable to have access to a human financial advisor as well. For example, if you’re planning to buy a home in a few years or you want to start saving for your kids’ college, a financial advisor can point you in the right direction.
Some robo-advisors follow a sort of hybrid business model, with access to human financial advisors for customers. A few provide unlimited access for all clients, others provide some access, and others let you pay a bit more to access human advisors.
If you work during the day, a customer service line that’s only available during “banker’s hours” might not be a great fit for you. If you run into a technical problem — say, you’re having difficulty making a deposit or navigating the advisor’s platform — it’s nice to be able to pick up the phone and talk to someone who can help. Customer support hours (and quality) vary significantly in the robo-advisor business, so be sure to check this information for any prospective robo-advisor.
Unique features that appeal 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:
- Robo-advisors offered by major brokerage firms or banks often integrate with other accounts at the company. This can allow you to view your balances in one place, and can facilitate easy transfers between accounts.
- Some robo-advisors offer discounts on other products and services from the same company, such as lower interest rates on loans.
- If you want to invest through a combination of a robo-advisor and do-it-yourself investing, there are several robo-advisors that allow you to do both through the same platform.
- Finally, some robo-advisors offer unique services. Some that we’ve seen include career counseling services, income planning services for retirees, and in-person customer events. Features like these aren’t likely to appeal to everyone, but can be very valuable to certain people.
View more information: https://www.fool.com/the-ascent/buying-stocks/best-robo-advisors/