For decades, traditional financial advisors were the only option for investors to get professional advice on how to manage their savings and plan for retirement. But behind the polished veneer and pretty stock charts that clients would view, a systemic industry problem remained: high fees.
Clients were paying premium prices for so-so service, and it wasn’t always the fault of the financial advisors. After all, a financial advisor can only serve a limited number of clients in any given day, month, or year. Beyond about 150 clients or so, it becomes very difficult to manage new client money because of all the rigamarole associated with investment management: compliance, portfolio allocations, research, and so on.
The problem was clients were paying fees that didn’t seem at first glance to be high but over time ate into their nest-eggs while financial advisors were limited in their ability to serve more clients based on their own bandwidth. Something had to give, and it did with the advent of robo-advisors.
Robo-advisors are a type of financial advisor that leverages technology to serve clients. Essentially, a robo-advisor is a digital advisor that relies on computer algorithms to automatically invest client assets. Some robo-advisors are purely digital while others, such as Betterment, offer a human component in additional to digital advice.
When you are considering who can best help you invest for the long-term, robo-advisors are an increasingly attractive choice. While human advisors used to dismiss their digital counterparts in the early days for lacking in the services they could offer, those objections are increasingly difficult to make as robo-advisors have expanded their features significantly.
These days, you can find robo-advisors that specialize in after-tax returns, socially responsible investing portfolios, tools and calculators, and a wealth of other options. In fact, consumers are spoiled for choice when it comes to the extensive range of robo-advisors. So, which one is best?
On the face of it, you might think the lowest fee robo-advisor is the ideal one to pick. But the lowest fee one may not support all your account types, including retirement, trust, joint, and entity. Or perhaps you want a robo-advisor who invests your dollars in a way that aligns with your values using thematic investing methods. Still others will prefer a robo-advisor who is goal-oriented so it is possible to bucket money in a way that aligns with goals to buy a new car, go on vacation, save for retirement, or purchase a new home.
Whatever your own individual preferences, there is almost certainly a robo-advisor out there who can serve all your needs and preferences. So, while it is tempting to compare on cost alone, and many of the leading robo-advisors do charge low fees (much lower than traditional financial advisors), the reality is you should weigh up your options carefully because once you send over your money, the likelihood is you will stick with that robo-advisor for a long time to come.
A snapshot of the criteria you should consider when picking a robo-advisor includes: fees, selection of account types, retirement tools, budgeting tools, mobile access, social impact portfolio options, tax considerations, and customer support.
Beyond management fees, don’t forget to ask about any other hidden fees that may exist whether commissions charges, exchange fees, withdrawal fees, or any other pesky charge that can worm its way into your financial statement.