Which automated adviser is the best option to manage your investments?
Science-fiction writers have long been predicting that robots will take over the world, and those predictions could soon come true in the lucrative investment advice market.
Recent years have seen the emergence of digital financial advisers — known as robo-advisors — which take advantage of modern technology to offer low-cost investment management services. In this guide we explain how robo-advisors work and how you can compare the services offered by different providers.
Our pick: Betterment Digital
Betterment's automatic investment site aims to improve your returns and support good financial habits with passive investing and financial planning support.
A robo-advisor uses complex algorithms and technology to perform many of the same services as a traditional financial adviser. These digital advisers can provide financial plans to consumers and automatically manage their investments.
Digital advice services are based more on building and maintaining a portfolio than providing strategic advice, so there will still be a place for traditional financial advisers in the future – in fact, the advantages the technology presents could be very useful tools for financial advisers. Humans vs. robots: Which adviser is better?
How does a robo-advisor work?
Unlike a traditional financial adviser, a robo-advisor isn’t influenced by emotion when making trades — it relies solely on algorithms and mathematical models to determine the right asset allocations for investors. They’re also much cheaper, with robo advice available for as little as one-tenth of the cost of receiving advice the old-fashioned way.
But how does the service match you up with a portfolio?
Details. Provide your investment goals, investment timeframe and appetite for risk so it can assess which portfolio you’ll be most comfortable with.
Review. The robo-advisor generates a recommended investment portfolio, which is usually based on exchange traded funds (ETFs). Review the portfolio and its terms and conditions to ensure you fully understand the risks of investing.
Invest. Once you’ve invested, the robo-advisor manages your portfolio and rebalances it whenever necessary to ensure it remains in line with your risk tolerance levels.
The rise of robo advice
The robo advice revolution started in the US a few years ago, and since then companies such as Betterment, FutureAdvisor and Wealthfront have enjoyed enormous success. Both Betterment and Wealthfront each manage more several billion dollars worth of customer assets, with the market expected to continue to rapidly expand in coming years.
In fact, research by KPMG has predicted that by the year 2020, robo-advisors will manage around $2.2 trillion worth of assets. We’ve profiled and compared the established players below, with several more providers expected to launch their own robo advice services in the next 12 months.
Acorns has offered robo advice with a spin on it to more than one million US investors. It allows you to link your bank accounts and credit cards to your Acorns account, and then invests spare change from your daily purchases.
You can set aside a recurring investment amount daily, monthly or weekly, or even invest a lump sum amount with the help of Acorns technology. Your money can be invested in a choice of five diversified portfolios based on your risk tolerance, with fees from $1 per month (for accounts under $5,000) or 0.25% per year (for accounts over $5,000) — plus, it’s free for college students.
Swell is a socially responsible investing service that allows you to trade portfolios of companies who are trying to make a positive impact on the earth — think green tech, renewable energy, clean water, zero wast, disease eradication and healthy living. The no frillsrobo advice service is ideal for an investor who want to keep trades to a minimum — or for an investment beginner.
The service has a minimum initial deposit of $50 with an annual fee sitting at 0.75% for both IRAs and taxable brokerage accounts, plus there are no trading fees.
Wealthfront is a cost efficient robo-advisor that invests in ETFs and currently manages billions of dollars in assets. It can support IRAs, taxable accounts and 401Ks with features such as tax-loss harvesting, automatic portfolio balancing and dividend reinvestment to help plan for retirement, save for college or invest in your savings.
Your initial $10,000 investment is managed for free and everything after is subject to 0.25% per year. The referral program also offers to manage an additional $5,000 for free with every customer referred.
Betterment boasts that over 250,000 people are investing with its robo-advisor service. Betterment has 12 different portfolios with varying goals and risk tolerance for you to choose from. All portfolios crafted by Betterment trade ETFs and automatically rebalance the account.
It is one of the few robo-advisors who have no minimum deposit, meaning if you skip that cup of coffee you can begin investing today. On top of that, the only fee you’ll be hit with is a 0.25% annual fee for the digital service.
Although FutureAdvisor uses algorithms that can make account recommendations, it’s more likely to be used by an investor with prior experience. It can manage taxable accounts or IRAs for an annual fee of 0.5%. And to adjust to your risk tolerance, your accounts will be rebalanced four to six times a year
You’ll need to have a minimum deposit of $10,000 to open an account with FutureAdvisor. It can give you peace of mind knowing that the accounts are held with two well-known brokers, Fidelity and TD Ameritrade.
Big banks like TD and Charles Schwab have also moved into the robo advice sector. To align with portfolios that best suit your needs, you’re typically screened questions about your current financial situation and future goals before being provided with tailored advice and assessment.
How do I sign up to a robo advice service?
The signup process differs between robo-advisors, but you’ll generally need to follow these steps:
Provide your name, contact details and proof of identity.
Complete a questionnaire regarding your investment timeframe and your tolerance for withstanding market fluctuations.
The robo-advisor generates a recommended investment portfolio.
If you’re happy with the portfolio, you can proceed with the recommended strategy.
Provide your bank account details to fund the investment.
The robo-advisor invests your money in the chosen portfolio, monitors the account and then makes adjustments to satisfy your tolerance for risk.
Robo advice may change the face of wealth management around the world by offering a more affordable way for you to look after your investments. However, make sure you compare the benefits and features of the different robo-advisors before choosing the right service for you.
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