How to pick the best robo advisor for you

A robo advisor helps his client chatting with him via the smartphone Chatbot concept. Colorful illustration

(Image credit: Getty)

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published 25 January 2023

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.

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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.

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.

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.

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.

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.

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.

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.

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.)

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.

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.

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’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.

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.

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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.