The Top Features to Look for in a Robo-Advisor

Robo-advisors are all the rage today, but that doesn’t necessarily mean they’re here today and gone tomorrow. While they’ve just recently exploded into the mainstream, sophisticated developers and fintech professionals have been perfecting the technology for over a decade now.

For the first time ever, everyday investors are giving robo-advisor platforms a serious look. In many cases, people are entrusting their wealth and retirement savings with algorithms over living, breathing human advisors.

Curiosity in robo-advisors is certainly expanding. Nearly half a trillion dollars is already invested with robo-advisors and billions more are on the way. But if you’re serious about pursuing this option, it’s important that you know what features to look for.

What is a Robo-Advisor?

A robo-advisor is essentially a sophisticated algorithmic-based software that’s designed to automate much of the complex financial decision-making that human financial planners and investors typically must make.

Robo-advisors rely on millions of points of historical data to make accurate projections and predictions on risk, diversification, and future fund performance. But they go much deeper than this. They also tailor each portfolio to the individual investor based on dozens of circumstantial factors and personal data points.

While every robo-advisor is different, each one typically starts with an online questionnaire in which the investor answers a series of questions about your financial goals, time horizon, risk tolerance, current assets and net worth, and investing experience. This information is combined with uncontrollable factors like market risk to create a personalized strategy.

Robo-advisors are extremely dynamic, which is another key benefit. Rather than “setting and forgetting,” robo-advisor algorithms constantly rebalance, reallocate, and adjust to account for changes in the market (or changes in your investment strategy or preferences). Some robo-advisors can even use tax-loss harvesting strategies to offset gains in other securities.

6 Features to Look for When Choosing a Robo-Advisor

There are more than 100 different robo-advisor platforms on the web these days. If you’re going to choose one, you need to make sure you’re aware of the different features that are out there. Here are several of the top ones to take into consideration:

1. Investment Options

The first factor to consider is investment options/strategies. In other words, which types of investments and/or specific funds will you be able to invest in? And, on a related note, how will funds be selected?

Almost every mainstream robo-advisor platform offers the ability to open basic mutual funds, IRAs (Roth and Traditional), 401ks, and similar qualified plans. You may also have the ability to invest in cryptocurrencies like Bitcoin or Ethereum. (However, you may be better off going with a dedicated crypto exchange for these investments.)

Having certain investment options is just half of the equation. You also want to make sure your robo-advisor is a fiduciary. This means they’re legally obligated to act in your own best interest, rather than selecting funds that make them the most money.

2. Specific Services

Consider the specific services that each robo-advisor offers. While they’re fairly similar across most of the big robo-advisors, there are some differences when you compare them on a granular level.

Automatic portfolio rebalancing is one service you should look for. This means the robo-advisor automatically rebalances your portfolio over time to ensure it’s in alignment with your specified investment goals and risk tolerance. This basically eliminates guesswork and allows you to enjoy optimal ROI with less risk without actually having to manually buy or sell funds.

You might also look for tax-loss harvesting. As previously discussed, this feature helps offset gains with strategically selected losses. It’s a sophisticated strategy that is difficult to do manually, but that can produce some nice tax savings when handled algorithmically.

3. Account Minimums

Make sure you factor in the account minimum for any robo-advisor you’re considering. Some robo-advisors have no account minimums, while others require as much as $100,000. Generally speaking, most minimum account balances are in the $500 to $5,000 range (with the majority falling on the lower end of that spectrum).

If you’re a newbie investor or only want to allocate a very small percentage of your portfolio to a robo-advisor, you’ll want to look for one that offers a very low (or no) minimum. Typically, you’ll find that the robo-advisors who have dedicated financial advisors accompanying the account will have higher minimum investments.

4. Fees and Costs

Robo-advisors might be cheaper than human advisors, but they don’t work for free. You’ll have to pay various fees and costs based on the different services you use.

The biggest charge is usually the account fee. This is the fee that the platform charges you for managing your money. In some cases, it’s a flat fee based on the investment tier you fall in. However, in most cases, it’s a percentage fee associated with the value of your portfolio. Somewhere in 0.25 percent to 0.50 percent is common. (For perspective, most human advisors charge around 1.00 percent for all assets under management.)

5. Access to Live Advisors

As mentioned, some robo-advisors offer hybrid plans where you also get access to a live advisor via phone, email, or video support. This can be a valuable asset, particularly when you have larger sums of money invested. If nothing else, a live advisor can answer questions and provide some of the emotional support that a robo-advisor isn’t equipped to give.

6. User-Friendly Platform

Consider the user interface and platform. Whether it’s a desktop website or mobile application, you’ll want to make sure it’s user-friendly, intuitive, and fluid. It’s also a good idea to inquire about native security features to ensure your account is being actively protected at all times.

The Top Robo-Advisors

There might be 100-plus robo-advisors in the industry, but there are only a fraction that are truly worth considering.

If you’re looking for more insights on how to select the best robo-advisor, I’ve analyzed several of the most popular options with head-to-head comparisons. Here are some of them:

The good news is that you really can’t go wrong with any of the ones I’ve highlighted above. It’s simply a matter of finding the right fit for your specific circumstances and goals.

Is a Robo-Advisor Right for You?

Robo-advisory might not be right for everyone. However, as these platforms continue to become more mainstream, it’s becoming more difficult to deny their value and utility.

If you’re searching for a low-cost, hands-off way to invest that aligns with your personal objectives, a robo-advisor is certainly worth considering. Begin the process of vetting different platforms to see if it makes sense for your portfolio!

Sky Richardson