In the space between DIY investing and personal — but pricey — financial advisors sits the robo-advisor, a crop of firms that manage client portfolios via computer algorithms, cutting prices and passing the savings on to investors. These online advisers have taken off over the last several years: There are currently a couple hundred firms in the race.
What’s a robo advisor?
A robo-advisor is an on-line financial advisory firm that leverages automation and algorithms to help manage client portfolios. That automation empowers robo-advisors to offer investment management services to consumers for a fraction of the price of a financial advisor that is human. Lower fees, joined with superior features like automatic rebalancing and tax-loss harvesting, can yield higher returns.
How they work
Most of the companies urge portfolios of low cost exchange-traded funds according to surveys that are on-line that investors fill out. The thought is that investors will do with generally diversified portfolios and low fees.
The companies use algorithms to put investors into various portfolios according to risk tolerance.
How to use Robo-Advisor
Automated Customer Onboarding – the questionnaire
The questionnaire is the first step of using Robo Advisor. User’s profile is being created with parameters like:
- age (defining overall risk aversion level)
- investment goals (defining users expectations)
- users experience with losses/gains
- making important financial decisions
Our Robo Advisory platform covers the interpretation of user’s answers into automated advise.
Balance projection gives the user quick view how his portfolio balance would look like in the future for given investment values. In order to make the projection more eye-catching we introduced possibility of generating balance curve based on either static growth or mathematical function development. For example, on average, portfolio increases 4% every year.
Asset allocation is the selection process of the right instruments adequate to users risk profile. Our platform allows to automate managing the allocation, using defined algorithm. For example, with higher portfolio risk we can invest more into stocks and with smaller portfolio risk we invest more into fixed income products. Real asset allocation model has to be decided.
It is possible to monitor user’s portfolio balance in user dashboard. Platform provides history of portfolio balance over the selected period. User is able to check his current portfolio allocation grouped by three factors:
- Instrument type
- Instrument sector
- Instrument region
Automated portfolio rebalancing is a crucial functionality for robo-advisory service. Let’s assume that user got asset allocation with 60% stocks and 40% fixed incomes. Over the time, because of the reinvesting dividends or other user-defined factor, his portfolio allocation changed to 70% stocks and 30% fixed incomes. User does not want to take such a big risk so we do portfolio rebalancing to back to original allocation.
List of successful robo advisors
Betterment is a perfect starting point for young investors. They make investing easy for beginners by focusing on simple asset allocation, goal …
A free and easy-to-use service that syncs up all your financial accounts in one location. Personal Capital creates summaries of your spending, net …
An automated investing service with an emphasis on asset allocation with low fees. Wealthfront’s service really shines with taxable accounts….
Stash could be the perfect investment app for a new investor. Its $5 minimum initial deposit removes the single biggest obstacle to investing, but the…
Fidelity’s entry into the robo-advisor service helps beginning investors. Its pricing is very transparent, and if you have an existing account, …
Aspiration may be the perfect robo-advisor service for anyone who wants to invest in socially responsible companies. They have low fees, and the fee-…
Vanguard Personal Advisor Services
Overall a solid entry into the robo-advisor space. Though the service will exclude beginning investors because of the high minimum deposit. Other robo…
WiseBanyan is a free robo-advisor service with some decent features. Unfortunately, we question if the business model is sustainable….
Hedgeable brings the techniques of hedge funds down to the less well-heeled masses, so everyone can have access to the investment industry “secrets.”…
TradeKing Advisors is a platform well worth investigating if you’re looking for professional investment management at a very low fee and $500 deposit …
Charles Schwab Intelligent Portfolios
Overall a decent service that deserves a looking into. Though we question its large allocation to cash and choice of some of the ETFs in order to make…
LearnVest is a decent free budgeting tool. Though compared to its competitors lacks investment reporting. Financial planning is available for an …
Rebalance IRA provides insight into your portfolio and helps you make better decisions by not letting emotions get in the way and selling too often, …
AssetBuilder might be a reasonable service to use on large accounts, particularly over $20 million where the annual fee is just 0.20%. But on smaller …
Financial Guard offers straightforward advice, to upgrade your current portfolio, pay lower fees, and choose better funds. Their business model is …
SigFig itself isn’t a bad service, but their recommendations seem simple at best. There are better robo-advisors available….
Extending the customer base
With a customer base that the size of each of the competition combined, based on Stein, robo advisory Betterment can also be bringing folks, along with assets. It’s not difficult to chalk that up to Stein, and its $0 account minimum admits that some of Betterment’s accounts are modest. But he says all of the customers counted in that tally are saving into funded accounts, with most putting a sizeable amount that is “ away.”
That minimum — or instead, the lack of one — has set the pressure on other robo advisors as well as traditional advisors, many of which have dropped their own minimums over the past year. Private Capital, which has $1.8 billion in assets under management, recently lowered its account minimum by an ambitious 75%, falling from $100,000 to $25,000. The company might have the ability to get away with a minimum still in five digits because its customers also get a dedicated financial advisor.
TradeKing Advisors has lowered its minimum. It found its two tiers of service with initial deposit conditions of $25, and $10,000 000; those minimums now sit at $ and $5, 000. Rich Hagen, the business’s CEO, told NerdWallet that minimums were lowered to remain competitive.
And Wealthfront lowered its account condition 500, noting from $5,000 to $ in a blog post that it was reacting to a “surge in demand” from youthful robo customers . Those customers desired to take advantage of Wealthfront’s generous pricing arrangement, which manages the first $10,000 completely free (Betterment bills 0.35% on accounts under $10,000 that consent to a minimum $100 monthly auto-deposit; those without auto-deposits are charged a monthly fee of $3. That $3 a month — which amounts to more than 7% per annum on a $500 balance — is a point of contention between the two robo-advisors, including a public war of words on Medium.)
What to look for
To the reader that is causal, the differences between robo advisory companies might appear small but in reality isn’t. You’ve got a choice between:
- Minimuml Deposit – Some robo advisories it is possible to start out with others and nothing need substantial sums to begin with
- Yearly Fees – Know about ETF fees and hidden costs
- Asset allocation – Asset allocation of each robo advisory may differ quite a bit based upon how old you are, and just how their risk assessment questions are answered by you
- Account Type Support – Do combined, they offer individual, IRA, etc.
- Automation – Some robo services are 100% automated vs human assisted advice
- Tax Optimization – Services like Tax-Loss Harvesting
- Custody of Funds – Handled by you in which they give advice to trading, or directly by the company
- Management of Assets – Manage only a part or all of your assets
- Ending-Target – Retirement simply, or other targets (i.e kids education)
Best Robo Advisors – Breakdown by Asset Size (2016 Ranking Comparison)
Below is the listing of this year’s top robo advisors by asset size.
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