Which Robo-Advisor is Right for Me?
There are many robo-advisors on the market to choose from but which one is right for you depends on a large set of factors including where you are in life, your level of income, your values, how much risk you are willing to bear, and the list goes on and on. To sort out which robo might be best for you, we made the following analysis.
Fees and dues
Most robo-advisors use index funds and ETFs. In that respect they are very similar to traditional mutual funds. They charge a percentage fee based on the size of the portfolio. These fees are typically much lower than the average 1% per year charged by actively managed mutual funds.
Other robo-advisors offer human advisors alongside their online tools. Some may charge an additional fee for consulting with human financial advisors.
It’s important to keep in mind that the upfront fees charged by robo-advisors aren’t the only costs. There are also fees embedded in the underlying investments - typically the management fees of mutual funds and exchange traded funds (ETFs) and trades. In most cases though, these are the same costs of low-fee funds you’d be paying if you were managing your own portfolio.
Some robo-advisors include other hidden costs like large mandatory cash allocations that pay only a small percentage of the actual revenue the robo-advisor earns on those funds.
Other robo-advisors offer tax-loss harvesting features that can be adding additional hidden costs to you in the form of lost opportunities.
Socially aware and gender specific funds
Some robo-advisor are investing in socially responsible funds while others target the needs of a specific gender, race or local. These robos hold an investment bias that benefit certain groups of companies or people. They appeal to the inner values of the investor.
Minimum Initial Deposit
This is the minimum dollar amount required by the robo-advisor to open and maintain an account. Some products require higher initial investments than others based on the types of services rendered.
Some robos help investors who hold a high percentage of their net worth in a single stock (typically the same company that signs their checks) to diversify their holdings in a tax-efficient manner over time. Single stock diversification typically involves using dollar cost averaging to minimize volatility.
As the name suggests, direct indexing allows you to directly purchase and own all of the individual securities of a major index as opposed to owning a mutual fund or ETF that tracks an index. Some research has suggested that direct indexing may be more tax-efficient than owning the equivalent index funds/ETFs by allowing investors to harvest tax losses on an index’s individual component stocks. Direct indexing also eliminates the management fees of index funds or ETFs, which prevents exact replication of the performance of an index investment. However, the actual calculation of fee savings must also take into consideration of the robo-advisors fees.
Tax Loss Harvesting
Tax loss harvesting involves selling securities that have experienced a capital loss and replacing it with a similar one, in order to help offset taxes on capital gains and income. Tax loss harvesting can reduce ordinary taxable per year.
Automated tax loss harvesting is one of the big ways that robo-advisors can increase return for investors without increasing risk. However, tax loss harvesting doesn’t benefit everyone. Investors using only tax-deferred accounts won’t see a benefit from tax loss harvesting.
Investors in a 0% capital gains tax rate, and even some investors in the 10-15% ordinary income tax brackets might not want to use tax loss harvesting. Investors in higher tax brackets investing in taxable accounts will see the most benefit from tax loss harvesting.
Fractional Shares investing involves trading on an exchange with small amounts of money. This can leave some cash on the sidelines and create a silent drag on returns. Some robo-advisors support trading in fractional shares, which lets investors buy shares down to 1/1,000,000 of a share. Fractional sharing products allow investors to diversify every penny in their investment account, instead of holding cash simply because the remaining funds in their portfolio isn’t enough to buy a whole share.
Not every entry in the robo-advisor category is completely automated. Some are 100% automated, while others combine an online interface and backend automation with personalized advice.
There are many ways to categorize online financial services, but to us, if an automated online advisor service provides automated rebalancing, low fees, and an online dashboard - then we’re considering it a robo-advisor for the sake of this comparison of the best robo-advisors, even if the service includes a layer of human advice.
For self-directed investors, investing with a robo that trades a passive index fund might not provide much more benefits than buying a traditional mutual fund. On the market, robos that holds the potential of a higher performance are few.
To answer the needs of self-directed investors, Stock Circles provides an actively trading robo called Smart Auto-Trading. The robo uses an artificial intelligence to screen, monitor and trade stocks. It targets the 'need for speed' of self-directed investors. The system is akin to a self-driving car but for trading and investing. It is equipped with sensors that scan social media and market data to find opportunities on the S&P and auto-trades them based on price changes.
This type of robo produces short-term trades which will be taxed at regular income. Connected to a tax-deferred account such as a rollover IRA, it can actively trade the stock market without needing the investor to pay taxes until taking a distribution. This type of active investing system offers a greater potential at building wealth than passive index funds or bonds.
This type of robo allows investors to build their own strategies and to test them in simulation mode free of charge.
The robo requires for you to hold an Ally Invest account. It trades directly in your account via an encrypted connection. Unless you request Managed Account services, you maintain custody of your account and are free to cancel the service whenever you want.
Ally Invest charges $4.95 per trade, which is the industry average these days for self-directed trading.
The robo-advisors market offers a variety of robo-services. These offerings are designed to fit the needs of every investor type. Some of them are replicating what active mutual funds do for less with the added benefit of tax-harvesting features. Then their are the robos who offer socially responsible or gender specific funds to target 'like minded' investors. Fractional sharing products allow an investor to invest every penny they have instead of leaving them in a low interest bank account. Last but not least, there are robos designed to augment the potential of self-directed investors.
Choosing a robo-advisor therefore lays in understanding a variety of parameters including; fees, taxes, where you are in your financial life, your values, the degree of independence and control you want over your investments and how much risk you are willing to take. To sort out these questions, we highly recommend for you to talk to your CPA or financial advisor as, robos offer varying costs/benefits that may require a tax professional or financial advisor's input.