robo advisors

The Ultimate Guide to Robo Advisors in 2022

Automation consistently changes our lives for the better: we rely on automated processes every single day to save time and money. It isn’t easy to imagine a time when you would need to visit your local bank before they closed on Friday afternoon to have cash on hand for the weekend. We rely on automation to do everything from adjusting our thermostats shortly before we arrive home to brewing our morning coffee before even resting one foot on the floor.

Automation makes every aspect of our lives easier, and the same holds true when it comes to investing. Even those who have embraced automation in every other corner of their lives may feel somewhat hesitant about automated investments. We get that.

For all its transformative wonder, the digital age has not been immune to scams. Skepticism is expected when it comes to convincing a first-time investor to hand over their hard-earned money to someone else. That is a hurdle for human investing, so you can imagine it is even more difficult when you are trying to convince someone to invest with….a robot?

We are here to help you understand why it is not only a safe strategy but also a smart one. While that Roomba circles your feet to swipe up every last crumb and while Siri or Alexa announce that your home has reached the optimal temperature, you can read on to learn more about why the next robot to assist you should be making your investments.

What is a Robo Advisor?

A robo advisor is an automated investment tool that uses specialized algorithms to optimize your investment portfolio automatically, with little or no input from yourself.

They almost always charge a fraction of the cost of a human financial advisor and use the same intelligent algorithms many financial planners use to optimize your investment portfolio.

Robo advisors are generally restricted to investment management and retirement planning. Even though they usually don’t handle cash-flow management or estate planning (with some exceptions), their services are quickly expanding. They now have 529 college savings accounts, 401(k) management, micro-investing, saving and spending accounts, and more.

Robo advisors also provide a more flexible approach to financial planning. A beginner investor might want a fully automated, hands-off solution, while a more seasoned investor may prefer a more flexible, hands-on approach for your investment portfolio. Whichever you prefer, there is a robo advisor for you.

With robo advisors, you don’t need to consult an expensive financial advisor or spend weeks reading hundreds of pages of confusing investor-speak. You don’t even need to know the best investment strategy for your demographic to reap high returns on both long-term and short-term investment portfolios. All the dirty work is already done for you.

Considering that a human financial advisor can charge an annual fee of 1-2% of total assets, a robo advisor will only cost you around 0.25% to 0.50% (some robo advisors even offer a free service). This low or no-fee service alone can save you many thousands of dollars.

What are the Best Robo Advisors on the Market?

We analyze many of the robo advisors on the market today, investing our own funds into the services, and give you an objective report on which robo advisors we determine to be the best available.

While there is no one best robo advisor for every investor (each person has their own unique needs and goals), we’ve found that these three robo advisors are the best services available for most investors:

Best Overall
  • Low (0.25% - 0.40%) Annual Fee
  • No Minimum Investment
  • Access to Human Financial Advisors
  • Excellent Banking Features
  • Socially-Responsible Options
Best for Beginners
  • Low Annual Fee (0.25%)
  • $5,000 Managed Free
  • Socially-Responsible Portfolios
  • Very Easy to Use
  • Excellent Financial Planning Tools
Best Free
M1 Finance
M1 Finance
  • 100% Free Forever
  • Very Customizable
  • Low ($100) Minimum Investment
  • Easy for Beginners & Experts
  • Socially-Responsible Portfolios
We may earn a small commission from sales generated from these links.

M1 Finance is the best overall robo advisor because it’s 100% free (zero fees) and offers both completely automated hands-off investment management. It allows investors to pick and choose their investments for a more hands-on approach if that’s what you want. They also offer a free checking account called Spend with some great features and a portfolio line of credit called Borrow, offering some of the lowest rates available. The only downside of M1 Finance is that they do not provide tax-loss harvesting for taxable accounts. Their account minimum is only $100 to begin investing for you, and they have options for socially responsible investing through expert-made funds.

Wealthfront is not only one of the first robo advisors on the market; they’re also one of the cheapest and full-featured. At only a 0.25% portfolio management fee (with the first $5,000 invested being free if you use our link to sign up), Wealthfront offers an entirely hands-off approach to automated investing as well as additional features and accounts such as their high-yield savings account, Wealthfront Cash, and a portfolio line of credit. Their account minimum is only $500, which is lower than average.

Vanguard Personal Advisor Services is the investment behemoth’s dive into the robo advising world. What makes them unique is their inexpensive (only 0.30%) approach to combining automated investing with access to human financial advisors. This is called a Hybrid Robo Advisor, and Vanguard PAS is the best service available offering this feature. The only drawback is that the minimum investment amount is $50,000, making it suitable only for larger investors. To get around this, Vanguard also offers a service called Digital Advisor, which only requires a $3,000 account minimum and lowers the fee to 0.20% but removes access to a human financial advisor.

How do Robo Advisors Work?

The exact workings of the robo advisors differ depending on the service you choose to use. However, they generally operate on the same principles.

Most services give the investor an automated, hands-off option to managed investing, whether you’re starting small or if you have larger amounts to invest.

This is precisely why you should read our expert reviews. We provide in-depth reports on the best robo advisors in the industry so you can determine the best investment service for your specific financial needs and budget.

What Happens After I Sign Up?

After signing up, you’ll answer a few essential questions about your budget, investment goals, and risk tolerance. The robo advisor will suggest a portfolio composed of various stocks, bonds, and ETFs (exchange-traded funds). Then all you’ll need to do is deposit or transfer the preferred investment amount. As you deposit money into your new investment account, the robo advisor will allocate your assets across your portfolio of investments based on similar algorithms that traditional financial advisors often use.

Usually, those investments consist of different low-cost stock and bond ETFs, and the individual allocations and selections will differ from one investor to another.

However, asset allocation is just the tip of the iceberg. They also provide many other account services, which we cover in our reviews and other pages.

What Features do Robo Advisors Have?

Robo advisors provide a wide range of wealth management products and services. Many of them can also offer automatic rebalancing, dividend reinvestment, and tax loss harvesting – benefits that were previously exclusive to expensive financial planners.

Automated portfolio rebalancing is when a robo advisor automatically adjusts the allocation of assets within an investor’s portfolio to maximize returns. Usually, your account is rebalanced monthly to keep you on the right path towards your financial goals. You can learn more about automatic portfolio rebalancing here.

Dividend reinvestment is when the service recognizes the pay-out of a dividend, assesses the best way to reinvest that money, and does so automatically without any direction from you. This helps keep your portfolio from holding too much cash, which isn’t earning you any return on investment. Learn more about dividend reinvesting here.

Tax loss harvesting is a slightly more complicated feature. In simple terms, it is the process in which the robo-advisor chooses the optimal time to sell a security that has experienced a loss. This is to offset taxes on other gains and profits. Learn more about tax loss harvesting here.

Are Robo Advisors Better Than a Human Financial Advisor?

We’re not saying that robo advisors are better than a human financial advisor, but there are clear advantages that robo advisors have over human advisors:

  • Opens new doors to smaller investors, who could only get market guidance through traditional methods.
  • The automation provides lower transaction fees.
  • Lower management fees equal more opportunity to grow – especially for significant portfolios.
  • Low barrier of entry: many robo advisors have low or no minimum investment.
  • Protects investors from avoidable risks such as greed and conflict of interest.

How Much Do Robo Advisors Cost?

Compared to a human investment advisor, robo advisors are extremely affordable.

The exact cost depends on which robo advisor you choose, of course. You should expect a robo advisor to cost between 0.25% and 0.50% of your account balance annually. This fee is much less compared to those of human advisors.

Even some free robo advisors provide quality services with no strings attached! Companies offering a free service have other financial services that earn the company a profit. Others only charge fees after your portfolio reaches a certain balance- typically over $5,000 or $10,000. You can find an analysis of our favorite robo advisors with the lowest fees here.

Fees eat away at your bottom line

What is a Robo-Advisor? - The Ultimate Guide 1

And that’s just with 1% fees; some financial advisors charge much more. With lower fees, you keep more of your earnings and can invest your savings!

The cost of an automated investing service is generally referred to as management fees. Fees are either charged as a flat monthly fee or a percentage of your account balance.

According to Bloomberg, traditional brokerage firms such as Morgan Stanley, Bank of America, and Wells Fargo are under pressure to justify the high fees they charge investors. Even they are scrambling to develop automated advisory services for their customers. In 2021, Statista reported that the number of people using a robo-advisor is up 33% year-over-year, and assets under management (AUM) have increased by 12.4% YoY. And that growth hasn’t shown any signs of slowing down.

Are Robo Advisors Safe?

Keeping your money safe is always a top priority. In today’s digital world, nearly every bank has a mobile app offering easy access to your finances. Reputable robo advisors implement the same level of security as your regular bank.

Robo advisors use a TLS connection and two-factor identification, verifying your phone number or email when you sign in on a new device to keep your information safe. You will likely need to connect your regular bank account to your new investment account, but your banking info won’t be stored in the app. You can take extra precautions by using a unique password, updating contact info, and avoiding signing into your account on an unsecured public network.

Overall, robo advisors offer a high level of security that you can trust. Trusted companies are also FDIC and SIPC insured, up to $250,000 for each account. The insurance doesn’t cover the value of your investments decreasing. If you buy a $100 stock and it drops to $50, don’t expect a check in the mail. The insurance covers a situation like your bank losing your money so that you can think of it as a safety net.

Which Robo Advisor Should I Use?

There are pros and cons to every robo advisor. Before deciding, it’s best to read a review, determine which features are important to you, and determine your budget – how much you want to invest initially.

If you’re a brand new investor, the amount of information can quickly become overwhelming. You understand the importance of saving and preparing for retirement, but it’s difficult to know where to start. Check out these robo advisors that are great for beginners.

While we can’t recommend a single robo advisor that will work for every individual, we offer recommendations based on your investing experience and budget. And of course, we have our favorites, including M1 Finance and Wealthfront, which we think will meet most investors’ needs. But you should determine your goals and compare the financial planning features offered before making you get started.

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