We sift through the pros and cons of the growing number of low-cost digital advisers. Illustration by Otto Steiniger By Nellie S. Huang, Senior Associate Editor December 23, 2019From Kiplinger’s Personal Finance Robo advisers, those automated investment advice services offered by banks, brokerages and other financial firms, have proliferated to the point that choosing one can be overwhelming. All robos promise low-cost, computer-driven investment management geared to your goals. But although they share similar characteristics, they are not alike. Some digital investment services are better for investors who are just starting out. A few are suitable only for the most conservative investors. Others are geared only for investors saving in retirement plans. At a glance: Each Robo Adviser Reviewed Robo advisers (a label the industry hates, by the way) now number in the dozens and manage billions of dollars in assets. Betterment, a pioneer, has amassed $20 billion in assets under management since its robo offering opened in 2010. Schwab’s Intelligent Portfolios launched in March 2015 and now has more than $43 billion in assets. The services bring investment advice, once the purview of the wealthy, to the masses. “Robos have democratized investing advice,” says Lule Demmissie, president of Ally Invest. No longer is an hours-long sit-down with an actual flesh-and-blood adviser required. “I’d have better luck getting someone in their twenties or thirties to go in for a cavity filling,” says Chris Costello, cofounder and chief executive of Blooom (yes, that’s spelled correctly), an automated retirement savings adviser. Robo advice is ready when and where you want it. Just grab your smartphone, tablet or laptop and click your way through a few questions about your goals, your tolerance for risk and your time horizon. In minutes, the algorithm kicks out a recommendation for a diversified portfolio designed by professional investors that’s appropriate for you, typically filled with exchange-traded funds. The robo will monitor the portfolio daily, automatically rebalance your holdings when required and shift the stock-bond mix over time as you near your savings goal. “I am supremely confident that the digital adviser will become the dominant type of investment advice service,” says Blooom’s Costello. Advertisement Before you decide to move your money or roll over an IRA to a robo firm, there are some caveats. For starters, opening an account at these outfits typically requires that you sell your existing holdings, move your money and buy certain funds. With taxable accounts, be sure to consider any potential tax consequences. These are advisory accounts, not brokerage accounts. That means, in most cases, you must stick with the recommended portfolio—although most firms will allow you to move up or down a notch on the risk scale between recommended portfolios. You can invest in a portfolio with a 90% stock position instead of the robo’s prescribed 80% stake, for example. But you can’t go rogue and decide to put 50% in cash or 100% in stocks. There are fees to consider, too. At most shops you’ll pay the expense ratios of your underlying holdings. But these fees tend to be low—less than 0.10% per year—because most of the portfolios hold ETFs. All in all, you’ll pay far less than 1% a year, the going rate for a typical money manager. But be aware, too, that some firms may charge you for added services, such as tax-loss harvesting, a tax strategy that offsets capital gains with losses. Robo offerings are still evolving. Many firms have added a “hybrid” configuration to their offerings that combines the algorithmic portfolio management service with access to a human adviser or certified financial planner. Some firms have dropped their account minimums. E*Trade dropped its minimum last year to $500 from $5,000. And many, including Betterment, E*Trade, Merrill Edge and Personal Capital, now offer socially responsible portfolios that focus on environmental, social and governance criteria. Says Demmissie, “We’re innovating to meet our customer’s needs. What works for a competitor may not work for my customer.” That’s good news. It means there is, or will be, a robo for almost every investor. Below, we’ve sorted through the offerings to help you find the right robo for you. Advertisement For investors just starting out At these firms, you don’t need to have a lot of money to get going. At Acorns, for example, just link your credit card or debit card to an account, and any purchases you make will be rounded up to the next dollar. The spare change automatically moves to your account and is invested in a portfolio of ETFs that is appropriate for you. “It ties the hard task of saving to everyday purchases,” says Acorns chief executive Noah Kerner. And Acorns is cheap at $1 a month for a taxable account, or $2 a month for an IRA account called Acorns Later. See Also: The Elephant in the Room: Your Adviser Is Getting Paid There’s no management fee and no minimum to open an account at Axos Invest (formerly WiseBanyan) or SoFi Invest, which makes them appealing to investors with small balances. Betterment Digital and Fidelity Go don’t have a minimum to open an account, either. But you will pay an annual management fee based on the amount of money you have in your account. Betterment Digital charges 0.25% a year; Fidelity, 0.35%. Retired investors making withdrawals Most robos are focused on accumulating wealth, but some help retired investors sort out their required minimum distributions from tax-advantaged accounts. Personal Capital, which calls for a $100,000 minimum to open an account, will set up paycheck-like withdrawals from your IRA to your bank account and withhold federal and state income taxes, too. Personal Capital gets extra credit for its Smart Withdrawal tool. It allows customers to explore how different withdrawals from tax-advantaged and taxable accounts might affect their assets over time. Betterment’s retired clients can set up regular distributions as well, but only federal income tax is withheld (you’re on your own for state tax withholding). Finally, Merrill Edge’s Guided Investing and T. Rowe Price’s ActivePlus Portfolios can arrange one-time distributions from an IRA. Both firms say a feature that allows regular automated withdrawals is coming. Savers who want 401(k) help Blooom, quirky spelling and all, can take the reins of your 401(k) account and manage it for you. It connects to your employer-sponsored retirement account—403(b)s and federal Thrift Savings Plans are eligible, too—and builds a well-diversified portfolio of the lowest-cost funds available in your plan. Over time, it monitors, rebalances and shifts your holdings to an appropriate mix of stocks and bonds as you near retirement. Advertisement Of course, Blooom’s algorithm focuses on the lowest-cost funds, which means it may overlook some standout actively managed funds your plan might offer (see The 30 Best Funds in 401(k) Retirement Plans). Still, says Costello, fees are “the one thing you can control when it comes your investments.” Blooom plans to unveil a tiered pricing system that depends on the level of services you require, but 401(k) accounts with less than $10,000 will pay just $40 a year. Note that a good, low-cost target-date fund already in your plan might do the job as well. Conservative investors We answered, where possible, the online questionnaire at more than a dozen firms, responding as a 50-something investor with a moderate risk tolerance, 12 years to go before retirement and $10,000 to invest. Many programs suggested a 60% stock and 40% bond portfolio. Ally Invest’s Managed Portfolios recommended a 56% stake in stocks, 14% in bonds and a hefty 30% in cash. A static 30% cash position is standard in Ally’s zero-fee robo portfolios. (Investors who want to be fully invested can opt in to a product that charges 0.30% of assets per year.) The decision to stash so much in cash came after the firm conducted a survey of its Managed Portfolio customers, says Ally Invest’s Demmissie, and learned that the average respondent held a 28% cash position. “An overwhelming number of our customers wanted a cash buffer,” she says. The cash helps people to stay invested and may deter them from selling low whenever the stock market turns down, she adds. But this cash-heavy portfolio is best for only the most nervous of investors who are worried about the market. Bear in mind that investors with such conservatively positioned portfolios may need to compensate by saving more in order to reach their goals. If you’re already retired, some firms offer portfolios geared toward capital preservation and income. Betterment offers four BlackRock Income portfolios that are invested 100% in bonds, tiered by risk level. They’re filled with bond ETFs that invest in U.S. Treasuries, mortgage-backed securities, and investment-grade and high-yield corporate debt, as well as emerging-markets bonds. The income portfolios are designed to preserve capital and provide steady income. The most conservative fund tilts toward high-quality short-term bonds and currently yields 2.05%. The most aggressive one, which is heavily invested in high-yield and floating-rate corporate bonds, yields 4.00%. Advertisement Investors with multiple goals Juggling life’s big-ticket purchases, such as a home or college, with the biggest goal—retirement—is difficult. The sign-up process at Merrill Guided Investing allows you to work toward multiple goals with different time horizons. You’ll have to set up different accounts to do so, as each goal will be assigned a separate portfolio, depending on how close you are to your goal and other factors. But you’ll be able to see all of your accounts on a single “dashboard” at Merrill Edge. Investors who want to talk to an actual person If robo advisers are a good first step for investors into the world of investment advice, then a hybrid robo adviser, which combines automated investing advice with a human touch, is a solid second one. These services typically start as a robo, with a digital accounting of your goals and investments. A consultation via phone or computer with an adviser follows. He or she can craft a more customized strategy—which could include individual stocks, bonds and mutual funds as well as ETFs—and answer questions about other financial issues, such as budgeting or when to claim Social Security. Five years ago, Vanguard’s Personal Advisor Services and Personal Capital were among the only hybrid advisers. (Both firms offer only hybrid services at the moment, though Vanguard is getting ready to launch its own digital-only advisory service.) Today, many financial firms that offered digital-only services at first, including Betterment, Fidelity, Merrill Edge and Schwab, now have hybrid robo services that include access to a certified financial planner. Expect to fork over more to open such an account. Fidelity Go’s digital-only service has no minimum, for instance, but you’ll need $25,000 to open an account with its Personalized Planning & Advice service. At Vanguard’s Personal Advisor Services, you need $50,000 to start, and the annual fee is 0.30% of assets (the fee drops for balances above $5 million). Personal Capital’s $100,000 minimum is even higher, and its 0.89% fee is a bigger annual nut, too (the fee tiers decrease for balances over $1 million). But the account comes with robust technical tools and eye-catching graphics that allow you to dissect and view your portfolio by asset class or holding, among other things. Investors who want to bank and invest all in one place Two robos are waging a small war over the rest of your cash. Wealthfront and Betterment recently offered high-yield cash accounts to customers. Wealthfront’s pays 1.82%; Betterment’s pays 1.85%. Wealthfront plans to add bill paying and direct deposit features, as well as ATM debit cards. “This is the stepping-stone to the financial nirvana we’re trying to build,” says Wealthfront spokesperson Kate Wauck. For its part, Betterment is now testing a no-fee checking account and debit card that it plans to roll out in early 2020. Meanwhile, SoFi already offers ATM withdrawals, a debit card, check-writing and a 1.6% yield on a cash management account, called SoFi Money, that is connected to its robo product. Customers’ money “is all in one account in which they can save and spend,” says Brian Walsh, manager of financial planning at SoFi. Customers at Merrill Guided Investing get a discount, starting at 0.05 percentage point, on the 0.45% annual management fee if they bank at the firm’s parent company, Bank of America, and have a combined balance between both firms of at least $20,000. The bigger the combined balance, the bigger the discount. A robo portfolio report card Thanks to Backend Benchmarking, which tracks the robo adviser industry by opening accounts with real money at each firm, we can see how some robo advisers have performed over the past three years. The Martinsville, N.J., advisory firm, in its quarterly Robo Report, recently reported that for the three years ending September 30, 2019, Fidelity Go and Axos Invest had the best-performing moderate-risk portfolios. For this ranking, Backend Benchmarking tracked the taxable portfolio at each firm that is closest to a diversified mix of 60% stocks and 40% bonds, both U.S. and international. Even so, these portfolios are not exactly the same. Some have as little as 60% devoted to stocks, and some have as much as 70%. In addition, the allocation to U.S. stocks versus international stocks varies from firm to firm, as does the fixed-income allocation to U.S. and international bonds. We created a composite benchmark of the MSCI All-Country World Index All Cap (at 60%) and the Bloomberg Barclays Global Aggregate Bond index (at 40%) to use as a general reference point. 3 year-annualized return Acorns 6.01% Axos Invest 7.61% Betterment 6.66% E*Trade 7.00% FidelityGo7.61% Personal Capital 6.11% Schwab 6.23% Vanguard 7.04% Wealthfront 6.98% COMPOSITE BENCHMARK*6.23% Data as of Sept. 30, 2019. *Composite benchmark return consists of 60% MSCI ACWI All Cap Index and 40% Bloomberg Barclays Global Aggregate Bond Index. Source: Backend Benchmarking.