Banking » Investing » How To Pick A Robo Advisor? Factors Investors Should Consider
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How To Pick A Robo Advisor? Factors Investors Should Consider

Unlock the secrets to selecting the perfect robo advisor: here are the main things to take into account when choosing one
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
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Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Robo-advisors cater to different investor profiles with varying features, fees, and investment strategies. Comparing them allows you to identify the platform that aligns best with your specific financial goals, risk tolerance, and investment style.

Here are the most important factors to consider when choosing a robo-advisor:

1. Fees

Comparing fees is important because it helps you understand how much you'll pay for using a robo-advisor.

Lower fees mean you keep more of your investment returns, while higher fees can eat into your profits over time.

To compare fees, look at the management fees charged by different robo-advisors. Check if there are any additional fees like transaction fees or account maintenance fees.

Consider the fee structure in relation to the services provided and the investment options available. For example, one robo-advisor might charge a flat percentage fee, while another might have a tiered fee structure based on your account balance.

2. Investment Features

Comparing investment strategies and features helps you understand how different robo-advisors plan to grow your money. It's like choosing a route for a road trip; some may take the scenic path, while others prefer the fastest route.

You want to pick the strategy that aligns with your comfort level, financial goals, and timeline.

Here's how to compare robo-advisor investment strategies:

  • Assess Investment Approaches: Determine if the robo-advisor uses active or passive investment strategies. Active strategies aim to outperform the market, while passive strategies track market indices.
  • Examine Asset Allocation: Look at how the robo-advisor distributes investments across various asset classes (stocks, bonds, real estate, etc.) to understand its approach to diversification.
  • Check for Customization: See if the robo-advisor allows you to tailor the investment strategy to your personal goals, risk tolerance, and time horizon.
  • Understand Risk Management: Evaluate how the robo-advisor manages risk, including its strategies for market volatility and downturns.
  • Transparency: Are they clear about how they make investment decisions?
  • Investment Philosophy: Do they focus on long-term growth, short-term gains, or steady income?
  • Analyze Investment Selection: Look at the specific investments (e.g., ETFs, mutual funds) the robo-advisor uses and their quality and performance.
  • Investigate Strategic Adjustments: Find out how often and under what circumstances the robo-advisor adjusts its strategy to align with changing market conditions or your evolving financial situation.
  • Consider Specialized Strategies: If you have specific interests, like socially responsible investing or targeting specific sectors, see if the robo-advisor offers strategies that align with these preferences.

3. Ease Of Use

You want a robo-advisor that feels simple and straightforward, making your investment journey smooth and stress-free. If it's too complicated, you might not use it effectively or might even avoid checking your investments, which isn't good for managing your money wisely.

You want a platform where you can easily make deposits, check your balance, and understand what's happening with your investments without feeling overwhelmed or confused.

To compare ease of use, check:

  • Signing Up: Is the account creation process quick and straightforward, or does it feel like filling out endless forms?
  • Accessibility: Check if you can easily access the platform through different devices, like smartphones and tablets, ensuring you can manage your investments on the go.
  • User Interface: The platform should have a clean, intuitive design that makes it easy to navigate and find what you need without confusion.
  • Getting Information: If you want to check on your investments or learn something new, is the information readily available and easy to understand?
  • Transaction Simplicity: Whether depositing funds, withdrawing, or rebalancing your portfolio, these actions should be straightforward and easy to execute.

4. Tax Optimization Options

Tax optimization is crucial because it can significantly affect your investment returns. Just like finding ways to save money on your shopping, tax optimization helps you keep more of your investment earnings by reducing the amount you pay in taxes.

Different robo-advisors may offer varying levels of tax-saving strategies, and choosing one that effectively minimizes your tax bill can lead to higher net returns over time.

Comparing tax optimization among robo-advisors is like comparing fuel efficiency in cars. You want the one that gives you the best mileage for your dollar. Here's how:

  • Tax-Loss Harvesting: Check if the robo-advisor offers tax-loss harvesting, a feature that sells investments at a loss to offset gains, reducing your taxable income. It's like using coupons to save money on your purchases.
  • Asset Location: Some robo-advisors use asset location strategies, placing investments in tax-advantaged or taxable accounts based on their tax efficiency. It's akin to organizing your groceries in the fridge and pantry to maximize freshness and use.
  • Tax-Efficient Investing: See if the robo-advisor focuses on tax-efficient investments, such as ETFs or municipal bonds, which can reduce your tax burden, similar to choosing energy-efficient appliances to save on utility bills.

5. Review Robo Advisor Performance History

You want to invest with a robo-advisor that has a strong track record of helping people grow their money. While past performance doesn't guarantee future results, it gives you an idea of how well the robo-advisor navigates market changes and manages investments.

Choosing one with a consistent and strong performance history can boost your confidence in your investment growing over time.

To compare performance history, think of it as comparing the track records of athletes. Here's how:

  • Look at Time Frames: Examine performance over various periods (e.g., 1 year, 3 years, 5 years). Just like an athlete's performance in different seasons gives a fuller picture of their abilities.
  • Benchmark Comparison: Compare the robo-advisor's performance against relevant benchmarks (like the S&P 500) to see if it's outperforming the general market.
  • Risk-Adjusted Returns: Consider not just the returns but how much risk was taken to achieve those returns. A robo-advisor that gets high returns with low risk is like a runner who wins races without exhaustive training.
  • Performance in Different Market Conditions: Check how the robo-advisor performed during market highs and lows. You want one that can handle both sunny and rainy days effectively.
  • Consistency: Look for consistent performance over time rather than one-time spikes, similar to preferring an athlete who performs well consistently over one who has had just one standout season.

6. What's The Required Account Minimum

You want to ensure you can afford the investment without stretching your budget. If the minimum is too high, you might not be able to invest at all.

On the other hand, a low or no minimum allows you to start investing with a small amount, making it easier to get into the market.

It's quite easy to compare account minimum. Here are the things to focus:

  • Check the Numbers: Look at the exact minimum investment required by each robo-advisor. Some might require $500, while others might need $5,000 or have no minimum at all.
  • Evaluate the Benefits: Sometimes, a higher minimum comes with perks, like more personalized service or advanced features.

7. Level Of Customer Support

Good customer support is crucial for addressing concerns, solving issues, and providing guidance, especially in the often-complex world of investing.

Robo-advisors with excellent customer support can enhance your investment experience, provide peace of mind, and ensure that you have a reliable resource to turn to for help or advice.

Comparing customer support among robo-advisors is akin to comparing service at different restaurants. Here's how you can evaluate:

  • Availability: Check the hours and days when support is available. Is it 24/7, or only during business hours? It's like knowing if a restaurant is open for late-night cravings or only during standard meal times.
  • Communication Channels: Look at the ways you can get in touch with them. Do they offer phone, email, live chat, or a help desk? It's similar to having multiple ways to order your food — in-person, over the phone, or online.
  • Online Reviews: read what other customers say about customer support. Are they professional? Do most consumers get the solution they need?
  • Response Time: Consider how quickly they respond to inquiries. If you're waiting too long for a response, it's like waiting too long for your food to arrive — frustrating and unsatisfactory.

7. Level Of Customer Support

Integration with other financial tools means a robo-advisor can connect and share data with different financial applications or platforms you use, creating a more streamlined and holistic view of your finances. For example:

  • Bank Accounts: Integration allows you to view your bank account balances and transactions alongside your investment information, making it easier to track your overall financial health.
  • Budgeting Apps: By connecting with apps like Mint or You Need A Budget (YNAB), you can see how your investments contribute to your overall financial picture, helping with budgeting and saving goals.
  • Tax Software: Integration with tax platforms like TurboTax or H&R Block can simplify the process of reporting investment gains and losses, ensuring accurate tax filings.
  • Retirement Planning Tools: Some robo-advisors can integrate with tools that help you project your retirement savings, allowing you to adjust your investment strategy based on your long-term goals.

This integration can help you make more informed decisions, save time, and reduce the hassle of manually coordinating between different platforms.

FAQs

Some robo-advisors offer the option to invest in individual stocks, either as a part of a customized portfolio or alongside their standard automated portfolios.

However, the primary function of most robo-advisors is to invest in diversified portfolios, often composed of ETFs or mutual funds, rather than focusing on individual stock selections.

No, a robo-advisor does not have 100% control over your investments.

While it automatically manages your portfolio based on the parameters you set, such as risk tolerance and investment goals, you retain the ultimate control, with the ability to adjust those parameters, pause or stop investing, and withdraw your funds at any time.

To switch robo-advisors, you typically need to sell your investments, transfer the cash to your bank, and then deposit it with the new robo-advisor, keeping in mind any tax implications or transfer fees.

While robo-advisors are generally designed for broad, diversified portfolios, some offer advanced features and strategies for more sophisticated investors.

To determine if a robo-advisor is suitable for retirees, check if it offers tailored investment strategies for retirement, such as conservative asset allocations, income-focused portfolios, and options for regular withdrawals.

Additionally, ensure it provides tools for retirement planning and the ability to adjust strategies based on changing retirement needs and market conditions.

Look for robo-advisors with low account minimums, user-friendly interfaces, educational resources, and good customer support.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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