More people are using robo-advisors to invest their money. This is becoming a popular option as a middle ground between DIY investing and seeing a financial advisor. This post will explain what a robo-advisor is, are robo-advisors safe, and the three best robo-advisors for investing.
I’m excited to have my friend and personal finance blogger Enoch Omololu from Savvy New Canadians to guest post on The Curious Frugal. He is sharing his insights into the top robo-advisors for investing your money. Enjoy!
This post may contain affiliate links. Please read my disclosure for more info.
Compare the Best Robo-Advisors For Investing
Investing with a robo-advisor has quickly grown popular among millennials, beginner investors, and experienced ones too.
The reasons are obvious. These online portfolio management services offer hassle-free investing options at a low cost and you can set up your account from the comfort of your home.
Many of them also offer their clients free financial advice, access to socially-conscious investment portfolios and several other smart options.
This article covers what you need to know about robo-advisors, their costs, pros and cons, how to choose between savings and investing, and more.
What is a Robo-Advisor?
A robo-advisor refers to an online wealth management service that uses proprietary software (algorithm) to setup your investment portfolio and keep it balanced.
The best robo advisors use low-cost Exchange-Traded Funds (ETFs) to minimize cost while maximizing returns. They design your portfolio using the Modern Portfolio Theory and a passive strategy that has been shown to beat active management time and again.
As a new client, you have to complete a profile questionnaire online. The answers you provide determine your risk tolerance, financial objectives, and the time span before you need to withdraw funds.
Based on a combination of all these factors, a robo-advisor could recommend you invest in a conservative, balanced, or growth portfolio.
They keep an eye on your investments and automatically rebalance when the assets stray away from their target allocations.
You can choose to invest using lump sum capital or can set scheduled contributions from your checking account. Robo-advisors invest new monies for you and you don’t need to worry about what to buy or sell.
Lastly, robo-advisors often offer their clients tax-saving services referred to as tax-loss harvesting as well as free financial advice from a licensed financial advisor.
>>> Suchot’s note: here is a quick comparison between robo-advisors vs financial advisors
Best Robo-Advisors for 2021
Here are three of the best robo-advisors you should consider in 2021.
1. Wealthfront
Wealthfront is easily one of the best robo-advisors in the U.S. Founded in 2011, it offers clients access to globally diversified portfolios made up of low-cost ETFs.
Some of the things you need to know about investing with Wealthfront include:
- Minimum investment: $500
- Types of accounts: Traditional, Roth, SEP, and rollover IRAs. You can invest using individual, joint, or trust accounts. They also offer 529 plans for college savings.
- Investment strategy: Passive. Larger accounts can access Smart Beta investing, Risk Parity, and stock-level tax-loss harvesting. All accounts enjoy standard tax-loss harvesting.
- Fees: You pay a 0.25% advisory fee per year. In addition, there are inbuilt ETF fees ranging between 0.06% and 0.13%.
In addition to investment portfolios, Wealthfront also offers a high-interest cash account that is FDIC-insured up to $1 million. This account has no fees and pays 0.35% APY as of June 28, 2020.
2. Wealthsimple
Wealthsimple is a robo-advisor investing service operating in Canada, the U.S., and the U.K. They have more than 175,000 clients and over $5 billion in assets under management.
Wealthsimple’s investment methodology is passive using diversified low-cost ETFs. Clients enjoy auto-deposits, dividend re-investing, automatic rebalancing, and free expert financial advice.
- Minimum investment: $0
- Types of accounts: Personal, joint and trust accounts; Traditional, Roth and SEP IRAs.
- Fees: 0.40% – 0.50% per year depending on your account balance. Clients with larger accounts get access to a dedicated team of financial advisors and pay a lower management fee.
In addition to investment portfolios, Wealthsimple also offers a high-interest savings account (Wealthsimple Save), socially responsible investment portfolios, spare-change investing, and Halal portfolios.
In Canada, they offer an online brokerage, Wealthsimple Trade.
Your assets with Wealthsimple are held in custody by Apex Clearing Corporation. They are protected up to $500,000. Wealthsimple Save deposits are also insured.
3. Betterment
Betterment offers two investment options: Digital and Premium.
Both accounts utilize diversified portfolios that are personalized to be in line with your risk tolerance and investment objectives.
Betterment Digital costs 0.25% per year while Betterment Premium costs 0.40% and provides access to unlimited financial advice from CFP professionals.
All accounts come with automatic rebalancing and tax-loss harvesting.
- Minimum investment: $0
- Types of accounts: Traditional, Roth, SEP and rollover IRAs; personal, joint, and non-registered accounts.
- Investment strategy: Passive
- Fees: 0.25% – 0.40% plus ETF fees ranging from 0.07% to 0.17%.
In addition to investment accounts, Betterment also offers a checking and savings account.
The checking account has no monthly fees. ATM fees are reimbursed, you get a debit card, and your deposits are FDIC-insured.
The savings account is also FDIC-insured up to $1 million and pays 0.40% APY as of June 28, 2020.
What Does a Robo-Advisor Cost?
The fees charged by robo-advisors are much cheaper than what you would otherwise pay for a similar mutual fund. Their annual fees comprise of a:
- Management fee: This is the fee you pay for someone else to set up your portfolio, buy and sell ETFs on your behalf, and keep the portfolio in line with your needs. Management fees range from 0.25% to 0.50% per year.
- ETF Management Expense Ratio (MER): The ETFs that make up your portfolio are issued by investment banks such as Vanguard and Blackrock. These funds have inbuilt fees ranging from 0.05% to as high as 0.50% for socially responsible investments (SRIs).
Investing vs. Saving
Should you put money in a high interest savings account or invest it? The answer to this question boils down to your circumstances.
1. Money Goals:
If you are saving towards a short-term goal e.g. to buy a car or pay for a vacation, you should be saving your money, not investing it. The same goes for your emergency fund.
For longer-term financial goals, such as saving towards retirement (5 years or more in the future), investing could get you better returns.
2. Risk Tolerance:
Savings accounts barely offer returns exceeding the inflation rate, however, you could potentially earn a lot more in the stock markets.
That said, investing in ETFs or stocks carries a higher level of investment risk. As the saying goes, “the higher the risk, the higher the expected returns.”
If you are averse to losing any part of your principal, a savings account works well. Add in the insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC), and your risk of losing money in a savings account is almost nil.
3. Liquidity:
Do you want to have access to your money on short notice? A savings account affords that flexibility. If your money is tied up in a mutual fund or stock, you could also sell it at any time. If the market is down, however, you could lose money.
Savings in a Certificate of Deposit (CD) is not as liquid if invested for a specified term.
4. Tax Savings:
Returns on savings are considered to be taxable income. This means they will be taxed at your marginal tax rate. Capital gains from selling a stock or dividends earned are taxed more favorably.
Also, investments in a registered account may enjoy tax savings until you start making withdrawals.
5. Fees:
Savings accounts do not charge account maintenance fees while you have to pay an annual fee to your investment manager or robo-advisor.
Are Robo-Advisors Safe?
The three best robo-advisors on this list are registered investment advisors. They are all regulated by the Securities and Exchange Commission. They are also members of the Financial Industry Regulatory Authority (FINRA).
Your securities and cash held at these firms are insured by the Securities Investor Protection Corporation (SIPC). You are protected by up to $500,000 should they become insolvent.
Note that there is a $250,000 limit for cash claims.
All investments carry an element of risk, and robo-advisors are just as risky as the mutual fund you buy at a traditional bank.
Pros and Cons of Investing with Robo-Advisors
There are benefits and downsides to using a robo-advisor for your investing.
Pros of robo-advisors
- Low-cost investing using diversified Exchange-Traded Funds
- Hands-free investing with automatic rebalancing; requires no prior investment experience
- Low or minimum balance requirement
- Great for beginners
- Utilizes a Nobel Prize-winning strategy
- Access to free financial advice
Cons of robo-advisors
- DIY investors can pay a lower fee by purchasing ETFs directly on a brokerage platform. These days, you can even buy all-in-one funds that do not need rebalancing
- You will have limited access to personalized financial advice
- Everything is online and you need to be comfortable accessing your account using a computer, smartphone or tablet.
Final thoughts on best robo advisors
There you have it. We have covered the basics of robo-advisor investing and some of the best players in the industry.
If you are very comfortable with investments in general, you could save a bit on fees by building your own portfolio. You can purchase financial products directly using an online brokerage platform.
The downside with this strategy is that you must be comfortable with running the numbers. You will need to rebalance your holdings with each purchase. You also have to pay attention to avoid excessive trading commissions.
If you choose to use an all-in-one fund, such as the ones offered by Vanguard, rebalancing will not be required.
Overall, robo-advisors can help you invest for cheap and grow your net worth over time.
Money Tips:
If you’re looking to get your net worth into positive numbers, 10 practical and mindset tips for getting out of debt will help
Here are 7 epic tips to pay down your mortgage faster
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Author:
Enoch Omololu is the resident personal finance expert at Savvy New Canadians. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School and has a passion for helping others win with their finances.