At Nummo we strive to help the average American gain control of their financial future. We aggregate as much cost information as possible about financial products to help you cut through the clutter and see the bottom line. This survey is our first foray into automated investment advice providers, commonly known as “robo-advisors”. We dive into each robo-advisor at the portfolio level to assess their performance based on the various risk tolerances of average investors.
While we rank* the robo-advisors based on historical performance and cost, because every investor is unique, we also point out features and services that may be of interest beyond financial performance. Some examples include access to an actual human financial advisor, bundled financial services products and specific strategies, such as tax-loss harvesting.
Robo-advisors are automated investment services that use a computer program to place and manage an investor’s money in diversified investment portfolios for a lower fee than a traditional investment advisor would charge. Robo-advisors are ideal for passive investors who do not have the time, knowledge or patience to manage their own investments in the stock or bond markets. Many robo-advisors also provide additional services which may help increase long term returns. Robo-advisors provide similar services in some areas compared to traditional advisors, but at a lower cost. A robo-advisor provides investment services in a fiduciary capacity through a digital platform. Utilizing computer algorithms built upon accepted financial theories, robo-advisors create slightly personalized investment portfolios for different risk tolerances and may provide 24/7 monitoring for those portfolios. A robo-advisor may also provide additional services like tax loss harvesting – making strategic sales to offset taxable gains – or allowing investors to purchase fractional shares of securities. The robo-advisor may also automatically rebalance your portfolio if your account begins to deviate from the ideal portfolio allocation. All of these services are designed for passive investors to get some of the benefits of investing with a traditional advisor, at a fraction of the cost.
How does a robo-advisor work compared to a traditional advisor?
In both cases, you provide basic information about your financial situation and goals, such as:
The answers to these questions let the investment advisor or robo-advisor know how “risk tolerant” you are. For example, if you are still relatively young and saving for a long-term goal (like retirement), then you can better withstand negative short-term movements in the market. This would give you a higher risk tolerance, since you would still have time to make up for any downward swings in the market. If you’re already close to retirement age, you would have a lower risk tolerance, since you would want to protect the retirement savings you’ve already accrued.
Based on your risk tolerance, the ‘robo-advisor’ or the human advisor would invest your money in different investment products. Robo-advisors typically use exchange traded funds, known as ETFs**, or mutual funds. Human advisors also frequently choose mutual funds or ETFs, but may also invest in individual instruments like stocks or bonds. The biggest differences are levels of service, fees and minimum investment requirements. For the personalized service they offer, traditional advisors charge higher fees and usually require a higher minimum investment. Robo-advisors, on the other hand, charge lower fees and have very low -- and sometimes no -- minimum investment requirements. But they also don’t typically offer highly personalized advice for individual situations, as a traditional advisor would. But that’s where the differences end, because traditional advisers often also use the same kind of algorithms to monitor your accounts, yet still charge more! The true value of a traditional advisor is that they’ll consider all of your financial assets – such as a home, rental properties, pre-existing investments or even a small business you may own – to help you construct a truly personalized investment portfolio. Robo-advisors don’t do that. But for investors who don’t have a lot of pre-existing assets or who don’t need sophisticated tax and financial planning, a traditional advisor’s higher fees may not offer the best value. Also, keep in mind some robo-advisors have human advisors you can speak with should you need one. With a traditional investment advisor, you’ll need to contact him or her to make changes to your account. With a robo-advisor, you’ll make any changes in your finances directly through the online interface (which isn’t much different from sending an email to your traditional advisor). The takeaway? With a robo-advisor, you may get a comparable return on your investment and get to keep more of your money, albeit with a lower level of service. The bottom line is, for the average American just looking to secure their financial future, robo-advisors provide a lower-cost and lower service alternative to traditional financial advisors.
Absolutely! If the thought of a computer program handling your emergency savings makes you uncomfortable, you can manage your own investments through an online brokerage account to invest in low-cost index funds for a small fee. While these low-cost index funds tend to post a higher return when the stock market does well, they aren’t as diversified as the portfolio a robo-advisor would create and manage for you. As a result, you would want to carefully monitor your investments in these index funds and ensure that the portfolio you have constructed continues to fill your needs. An online brokerage account gives you a user-friendly interface to open and manage your own investment account. Unlike a true robo-advisor, you are responsible for researching and choosing which investments are best for you and the service does not owe you a fiduciary duty to act in your best interests.
Which robo-advisor and portfolio type is best for you depends on several factors: what your goals are, what additional services you want, your income and how much you have to invest up front.
The following rankings compare portfolios with similar risk profiles and highlight what we believe are the strongest portfolios in each group, based on the portfolio’s net return. Your specific risk preference will dictate the appropriate risk profile.
Other services may make one robo-advisor better for a particular goal, such as having emergency savings vs. saving for college, or your level of investment sophistication, such as a need for tax-loss harvesting.
Conservative and Income portfolios invest in ETFs that hold assets with a lower risk profile and are better suited for accounts where individuals will start to withdraw their funds sooner rather than later. These portfolios are a great choice for investors who are close to reaching their goal or who want a low risk portfolio, but still want some level of return (such as monthly dividends from ETFs that hold primarily bonds). These portfolios are not as susceptible to wide changes in the market and thus provide a “safer” investment choice. However, as a result, they also generally have a lower return than a more aggressive portfolio.
Balanced portfolios invest more in ETFs that hold assets with a higher risk profile and can serve a variety of purposes such as: general investing, retirement accounts that aren’t yet relied upon as a source of income, and college savings or home purchase accounts with a moderate time horizon. Investors will often switch to a more balanced portfolio the closer they get to reaching their goal, in order to protect their nest egg and limit exposure to big swings in the market.
Growth and Value portfolios invest in assets with primarily higher risk profiles, which, when things go right, typically have a higher return. These portfolios have the highest exposure to big changes in the stock market. In other words, their potential upside comes with the risk of a big downside, too. These portfolios are good for investors who have more time (e.g., young people saving for retirement) before they need to pull out money, or who have a higher risk tolerance (e.g., higher disposable income, higher future income, etc.).
Today, there are a lot of options for investors considering a robo-advisor. The best choice for any investor will depend on his or her own unique financial situation. More financially savvy investors may want to choose a robo-advisor solely based on returns (the higher, the better); fees (the lower, the better); and more sophisticated strategies, such as tax-loss harvesting.
If you think you’ll need help reaching your financial goals and want the benefit of a human advisor to call when you have questions, look for robo-advisors who offer those services. You’ll also want to consider any investment minimums, versus how much you have to invest.
Financial independence happens when investors are more informed. Use this information to ask informed questions of any financial service before you open an account.
* The return metric used in the report does not consider fees charged at the advisor level. For information about what the report’s return and cost metrics consider, see the Limitations section. Click here to know more
** To learn more about the benefits of investing in ETFs, see The Exchange Traded Fund (ETF), Nummo (July 17, 2017). Click here to know more