Though the investment markets continue to be scary, there’s some good news for anybody who is ready to put some money to work. Thanks to fierce competition among robo advisor firms, even beginning and small investors can now get top-notch portfolio advice and management at vanishingly low prices — in some cases, for free.
Robo firms have developed sophisticated computer programs to assemble and manage portfolios tailored to individual investor’s risk tolerance and investing horizons. Many are also now racing to offer extras, such as even more portfolio personalization, stepped-up tax strategies, access to alternative assets and more of a human touch.
As a result, individual investors of all stripes “can get great service and a soundly constructed portfolio that fits your risk tolerance at low costs,” says Amy Arnott, portfolio strategist at Morningstar, the investment research firm. Robos might even outshine their human counterparts in some areas. “They can eliminate biases,” says Sophia Duffy, associate professor of business planning at the American College of Financial Services. Such biases might lead to suboptimal portfolios for women or other groups, she says. However, although robo advisors are supposed to follow the Securities and Exchange Commission (SEC)’s fiduciary rule and act in clients’ best interest, in reality, computer programs are only as trustworthy and capable as the humans who program them, Duffy observes.
“Platforms can be built to recommend what’s in the best interest of the firm, not necessarily the client,” she says. Before you commit your money, make sure you cover the basics with any prospective advisor:
Costs Barbara Friedberg, the founder of Robo-AdvisorsPro, warns that many investors don’t realize they are typically charged at least two kinds of fees. On top of an overall management fee, you’ll also pay annual expenses, as a percentage of assets, for each mutual fund or exchange-traded fund (ETF) in your portfolio.
The management fees for most of the firms we analyzed range from 0% to 0.85% of assets. A few firms instead charge monthly subscription fees ranging from $3 to $9, which for small investors can amount to a higher percentage of their portfolio but, for large portfolios, can offer a real bargain.
Sophia Duffy urges the robocurious to ask about the costs of closing an account, too. Some firms charge exit fees, she notes.
Potential conflicts If the fee seems unusually low, “there’s got to be a catch somewhere,” warns Arnott. Some firms are willing to lose money on free or nearly free management services, using them as loss leaders to attract new clients. Others collect their money in less-obvious ways — for example, by putting your money in their own higher-fee funds, pressuring you to use other services — such as checking accounts or loans — or allocating some of your investment to low-paying cash accounts so they can invest the money at higher rates and keep the difference.
Portfolio particulars All robo firms require you to fill out a questionnaire about your goals and risk tolerance to generate a portfolio. If a firm won’t provide much information on the specific funds you’ll invest in until you commit your money, “it’s a big red flag,” says Arnott.
Find the best robo advisor for you
Kiplinger has summarized some strengths and weaknesses of 10 major companies and identified some of the specific needs they serve so you can more easily find one that suits you.
Where quoted, portfolio performance numbers come from Condor Capital Wealth Management’s third-quarter 2022 Robo Report. Condor Capital has invested roughly half a million dollars in test portfolios at 33 robo-advice firms and publishes returns quarterly. Although Condor tries to choose a standard portfolio of 60% stocks, 40% bonds for a fair comparison, it isn’t always possible, says David Goldstone, manager of Condor’s investment research. So portfolio returns are not directly comparable but are provided for context. (Portfolios cited here have stock allocations ranging from 52% to 67% of assets, bond allocations from 32% to 43%, and cash positions of 0 to 11%.) Expense ratios refer to what each firm considers its basic or “core” portfolio and in most cases are roughly equivalent to the expenses of the Robo Report portfolios.
This robo is advised by some mighty financial oaks, including Nobelists Harry Markowitz and Richard Thaler.
Acorns is best known for its debit card that rounds up clients’ purchases and sweeps the change into robo-created portfolios of low-cost ETFs from firms such as BlackRock and Vanguard. Its strength is helping young people save and invest. Acorns has no minimum investment requirement. It charges $3 a month for a one-person account and $5 a month for a family account that creates additional investment accounts for kids.
Funds in Acorns’ core portfolio have an average expense ratio of 0.04%, according to Robo Report. (Acorns did not provide expense information.) The core portfolio tracked by Robo Report notched a five-year annualized return of 2.5%, below the 3.1% average for the core portfolios of the robos included in this article
One of the first robo advisors, Betterment recruits beginners by requiring only $10 for a minimum initial investment. Fees for the basic robo account for investors with less than $20,000 were recently converted to a subscription model that might seem a little steep to small investors — $4 a month. That $48 a year equates to about 1% of a $5,000 portfolio. Once your balance hits $20,000, you’ll switch to an annual fee of 0.25% of assets. Those with at least $100,000 can upgrade to a premium tier.
It charges a higher fee of 0.4% but gives you unlimited access to certified financial planners. The underlying funds in Betterment’s basic portfolio have an average expense ratio of 0.09%.
Betterment also provides extra services to those with big tax bills and people in retirement. It automatically harvests tax losses (selling losing investments to offset gains or income at tax time) and has services to help retirees turn their investments into steady income in tax-smart ways. Besides the standard broad-market indexes, Betterment provides choices including an “innovative technology” portfolio that invests heavily in growth-oriented stocks, a Goldman Sachs-designed “smart beta” portfolio that overweights sectors Goldman managers think will outperform, and portfolios that focus on the environment or minority empowerment.
Unfortunately, Betterment’s basic portfolio tracked by Robo Report has lagged lately, earning a 2.5% annualized return in the five years ending September 30, below the average for the robos on this list.
E*TRADE CORE PORTFOLIOS
E*Trade sets a $500 minimum investment and offers clients three choices: a standard index portfolio, a portfolio that emphasizes environmental, social and governance values, and a “smart beta” portfolio that mixes in funds that invest in stocks that E*Trade managers believe to be undervalued.
E*Trade charges a management fee of 0.3%, and the ETFs in its core portfolio have an average expense ratio of 0.05%. The merged program currently offers fewer extras than some others on this list. For example, E*Trade customers can call and talk to a human about their investments, but there’s no general opportunity to consult with CFPs, for example. Chad Turner, who heads E*Trade’s Core Portfolios, says new services, such as automatic tax loss harvesting, will be added in 2023. The E*Trade portfolio tracked by Robo Report earned 2.8% over the past five years, below the average for this list.
ELLEVEST DIGITAL INVESTING
This robo service focuses on women, and its retirement portfolios are designed to take into account their average lower earnings and longer life spans.
Founded by longtime Wall Street executive Sally Krawcheck, Ellevest requires no minimum investment. Its entry-level “Plus” membership fee is $5 a month. Ellevest also offers a premium “Executive” $9-a-month service. All members get access to webinars and discounts on coaching sessions from certified financial planners. Members can put their savings into either a basic or an “impact” portfolio. The impact portfolio puts about half of the money into funds that focus on companies for which women play leadership roles, that promote community development or that serve other sustainability goals.
The funds in Ellevest’s core portfolio have average expenses of 0.07%. Robo Report says the basic portfolio it tracks returned an annualized 3% over the past five years, just a tenth of a point below the average for this list.
Beginners won’t get a better price anywhere. You need only $10 to get started, and investors with less than $25,000 get Fidelity Go’s service for free. There’s no advisory fee, and Fidelity invests your money in its Flex index funds, which don’t subtract expenses from their returns. If you’re a successful saver and investor, though, your free lunch ends. Once your account hits $25,000, you’ll be charged an annual fee of 0.35% of your balance ($87.50 a year on $25,000) and will gain access to unlimited one-on-one financial coaching. (That hybrid service absorbed the firm’s previous hybrid offering, called Fidelity Personalized Planning & Advice.)
For these low costs, you don’t get a lot of choices, just the Flex index funds. You can tweak your allocations, but there’s no other personalization, such as thematic investments. The funds have done well, however. The 3.8% five-year annualized return for the Fidelity Go portfolio tracked by Robo Report puts it well above the average for this list.
MERRILL GUIDED INVESTING
Merrill is the least robotic of the robo advisors. New clients, who must invest at least $1,000, get a computer recommended investment strategy based on their goals and risk tolerance. But instead of filling stock and bond allocations with broad index funds, Merrill’s chief investment office favors more targeted or thematic ETFs with the goal of outperforming the market. Merrill charges a 0.45% fee on top of the expense ratios for the underlying funds in its core portfolio, which average 0.06%. For those who want access to a financial advisor, Merrill charges 0.85% for its hybrid service. Bank of America customers in its Preferred Rewards program can get discounts.
Merrill’s hand-picked portfolio has performed well, earning an annualized 3.3% over the past five years, just ahead of the 3.1% average for the core portfolios on this list.
SCHWAB INTELLIGENT PORTFOLIOS
In June, Schwab paid $187 million to settle Securities and Exchange Commission charges that it misled investors about the way it makes money from its robo service. Instead of charging a management fee, it requires investors to put a portion of their money in cash accounts so that it can invest the money in higher-paying investments and keep the difference.
Anthea Tjuanakis Cox, managing director for digital advice and planning at Charles Schwab, says the company is clear with its clients about the trade-off between the cash requirement and paying an advisory fee. “Cash can be a ballast for diversified portfolios and can be useful in times like these,” she says. The average Schwab Intelligent Portfolios client has 8% to 10% of assets allocated to cash, according to Schwab, based on a client’s risk tolerance, goals and time horizon.
Cash was certainly a plus in 2022. Schwab’s portfolio lost only 15.9% in the 12 months ending September 30, below the 16.8% average loss for the core portfolios of the robo advisers we looked at. Not surprisingly, cash is a drag on long-term returns. Schwab’s five-year, 2.3% annualized return for the portfolio tracked by Robo Report puts it in last place for that time period among the portfolios on this list. And Schwab says the ETFs it offers in its core portfolio carry an expense ratio of 0.13%, the highest among similar offerings on this list. But Schwab offers several enticing services. Retirees may be especially interested in Schwab’s Intelligent Income tool, which automates withdrawals to generate a monthly check in a tax-efficient way.
Schwab has a menu of more than 50 ETFs, including its standard index funds as well as funds that factor in fundamentals such as cash flow. The firm’s basic tier starts with a $5,000 minimum investment. Once your account reaches $25,000 you can opt for the premium service, which charges a one-time $300 fee and then $30 a month for unlimited access to Schwab-certified financial planners. At $50,000 you will be offered automatic tax-loss harvesting.
SOFI AUTOMATED INVESTING
SoFi offers many free services to its robo advisor clients. There’s no minimum investment. It manages your portfolio for free. Expenses for the underlying ETFs in its core portfolio average just 0.03%. And you get free extras such as financial and career coaching. The firm gives investors five different mixes of stock and bond ETFs to choose from.
Robo Report says its SoFi portfolio has returned an annualized 3.5% over the past five years, above the average for this list. But SoFi does not offer much personalization or an ESG option. And both Condor’s Goldstone and Morningstar’s Arnott warn that SoFi, which has lost money for several years, may at some point either hike fees or ramp up marketing to push customers toward its more-profitable services, such as loans.
VANGUARD DIGITAL ADVISOR
Vanguard’s basic robo-service is less than three years old. But it has become a major player in part because of its low management fees of 0.15% and underlying fund expenses of just 0.05% in its core offering. For those reasonable fees, new investors, who must invest at least $3,000, get a simple portfolio of four Vanguard ETFs that give them broad exposure to stock and bond markets the world over. Or they can choose a similar portfolio with an ESG tilt.
Vanguard’s basic tier has some attractive extras, such as the ability to create multiple savings goals within one account. And Brian Concannon, head of Vanguard Digital Advisor, says the firm will add automatic tax-loss harvesting and a retiree income withdrawal service in 2023.
Customers with $50,000 can upgrade to Vanguard Personal Advisor Services, which provides more investing options, including municipal bond funds and some actively managed dividend and international funds. It costs slightly more — 0.3% of your portfolio — and offers unlimited access to financial advisors.
Because Vanguard’s basic robo portfolio is so new, Robo Report has only two years of return data. Over that period, the core portfolio notched an annualized loss of 1.7%, more than a percentage point worse than the average for the robos in this list over the same period.
As one of the last pure robo services, Wealthfront boasts a low minimum investment of $500 and low fees (a management fee of 0.25% and underlying core portfolio funds with an average expense ratio of 0.08%).
It relies almost entirely on technology to manage its nearly 500,000 accounts. Wealthfront has only 12 human customer service representatives. “Wealthfront does not offer access to human advisers because from day one our clients have told us, ‘I pay you not to talk to me,’ ” says Alex Michalka, director of investments.
For those who want more than a basic index offering, Wealthfront allows investors to personalize their portfolio with hundreds of ETF choices. The service also automatically harvests tax losses daily.
Robo Report tracks three Wealthfront test portfolios and says that as of September 30, its original core portfolio notched a 4.4% annualized return over the past five years, which puts it at the top of robos we looked at for that time period. Newer Wealthfront portfolios — which have less energy exposure, for example — have posted lower returns.
Take our quiz to find the right robo advisor for you
Q: How much human involvement do you want in your investment?
- A: Almost none. I don’t want to talk to people.
Consider: Wealthfront, which prioritizes online usability rather than phone services.
- B: I’d like unlimited access to a human.
Consider: SoFi Automated Investing or premium tiers at Betterment Digital, Fidelity Go, Schwab Intelligent Portfolios and Vanguard Personal Advisor Services.
Q. How complicated are your finances?
- A: Very simple.
Consider: the basic tiers at Betterment, Fidelity, Vanguard or Wealthfront.
- B: I’d like help saving for several different goals.
Consider: Betterment or Wealthfront, which offer multiple savings “buckets” in their basic offerings.
- C: Pretty complex.
Consider: Betterment Premium, Schwab Intelligent Portfolios Premium or Vanguard, which offer access to certified financial planners.
Q. Where are you in your investing journey?
A: Just starting out with very little money.
Consider: SoFi or Fidelity for their low minimum investments and feefree management.
B: Midway. I have a good amount of money to invest.
Consider: The basic tiers of most major providers on our list offer reasonable costs and services.
C: I’m approaching retirement and would like help figuring out how best to start spending my savings.
Consider: Betterment or Schwab for their services that turn retirement savings into income.
Q. How important is values-based investing to you?
A: Not at all. I focus on returns, period.
Consider: Fidelity, SoFi, Merrill Guided Investing, or Wealthfront, which have logged above-average long-term returns.
B: I want my investments to address environmental, social, or corporate governance concerns.
Consider: Betterment, Ellevest Digital Investing, Vanguard, or Wealthfront, which offer ESG choices.
Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.
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