How to Select the Right Robo-Advisor for Your Portfolio

Key Takeaways 

• When seeking a robo-advisor, there are certain criteria investors should consider regarding financial, investment options, support, and security aspects.

• Generally, the more personal services a robo-advisor offers, the higher the minimum initial investment required. 

• The investor should make sure they completely understand all expenses and fees that any robo-advisor in which they are interested assesses. 

Many investors face a dilemma: how to choose a robo-advisor? After all, such services are increasingly popular as investors seek automated and cost-effective financial solutions. Robo-advisors use technology to manage clients’ investments, employing a strategy constructed around their goals and preferences. Some even provide additional financial guidance and planning, creating a mix of automated and human support.

As such, robo-advisors such as Fidelity, Schwab, Ally, Vanguard, and Etrade are interesting options for some investors. Here is how investors can empower their journey by selecting a robo-advisor that aligns with their financial goals. It is a guide for those considering robo-advisors as an alternative to traditional brokers.

How to Choose a Robo-Advisor

When seeking a robo-advisor, there are certain criteria investors should consider regarding financial, investment options, support, and security aspects.

Financial

• Account minimum. This refers to the minimum investment necessary to open an account. Because these can range from zero to six figures, account minimums will figure prominently in the decision-making process. If the investor does not have a large sum to invest, their options could be limited. Generally, the more personal services offered, the higher the minimum initial investment required. 
• Account management fees. These are ongoing fees charged for managing the account. Compare these against other robo-advisors and even traditional advisors. Such fees, usually charged annually, can play a major role in long-term returns. They typically range from 0.25% to 0.50%. The investor should make sure they completely understand all expenses and fees that any robo-advisor in which they are interested assesses. 
• Investment expense ratios. These are costs associated with portfolio investments. Underlying exchange-traded funds or mutual funds will still be subject to expense ratios and transaction costs, unless otherwise specified. Aim to keep expense ratios as low as possible.
• Account fees. These include annual, transfer, and closing fees, which can be monthly or yearly, or a percentage of the investment. Generally, fees are between 0.15% and 0.50% of assets under management. A human advisor will cost more, but hiring a robo-advisor will be more expensive than a do-it-yourself option. Investors should run the figures before deciding.

Investment Options and Strategy 

• Portfolio mix. This refers to the variety of asset classes and investments available. If an investor only wishes to take positions in a few index or lifecycle funds, they may want to consider a do-it-yourself option. Be certain the robo-advisor has sufficient options to offset fees and compare with other robo- and traditional advisors. Pay attention to the number of asset classes that are included in portfolios. Investors should be mindful, though, that certain market sectors and asset classes will fall in and out of favor. Thus, it may make more sense for investors to look at robo-advisors’ overall offerings and select a platform that aligns with their personal preferences.
• Socially responsible portfolio options. This is the availability of investments focusing on ethical, social, and environmental criteria. Many robo-advisors focus on socially responsible investing
• Tax strategy. These are strategies employed to minimize tax liability, such as tax-loss harvesting. Most robo-advisors offer tax-advantaged as well as taxable accounts. Tax-favorable accounts will likely include IRAs, for example, but there may be fewer options for more niche accounts such as a 529 plan. Note that it is now common for robo-advisors to offer as standard tax-loss harvesting, which can increase returns by as much as 0.95%, Vanguard said in a 2023 report. This may be important if the investor has a taxable investment account.
• Automatic rebalancing. This is how the platform maintains the portfolio’s target asset allocation over time. Many investors offer automatic rebalancing at no additional cost.

Support and Resources 

• Customer support. This refers to the accessibility and quality of the platform’s customer service. The investor experience plays a primary role in enhancing trust and satisfaction. Thus, it is key for the robo-advisor to offer responsive, top-notch customer service.
• User experience. Is the platform easy to use, and is there a mobile app available? Select a robo-advisor with a user-friendly platform that renders investing and money management as easy as possible. An unwieldy or clunky platform is a turnoff for many investors, particularly if fast and reliable customer service is lacking. Investors should be sure to find a platform with which they are comfortable. Most robo-advisors have apps for Android and iOs.
• Educational resources. This is about the availability of learning materials about investing as well as platform features. If this aspect is important to the investor, they should choose a robo-advisor that offers educational information.

Security and Additional Features

• Security measures. This refers to protocols to protect investors’ accounts and personal information. When an investment account is opened, some robo-advisors will have funds held by a third-party custodian. While this is common practice, the robo-advisor should be clear about who this custodian is. Should the robo-advisor experience financial woes, the investor wants to be certain their money is safe.
• Human Advisor Option / Human Portfolio Oversight: Availability of professional advice or portfolio management. In addition to investment management, a human advisor can help the investor with estate planning. college savings, debt payoff, and tax strategies and the like. If this is what the investor needs, they should select a robo-advisor that provides occasional access to a live human advisor. At the very least, the platform should have educational information.
• Bank Account/Cash Management Account: Features for managing cash, such as interest rates and withdrawal options. Many robo-advisor platforms are now offering checking and cash management.
• Accounts Supported: This refers to the types of accounts available, like IRAs, taxable accounts, etc. Most digital advisors focus on taxable accounts and individual retirement accounts. If the investor has a 401(k) account, they should prioritize it because of guaranteed matching returns.

Are Free Robo-Advisors Worth It?

While robo-advisors are free, are they worth it? After all, fees are just one part of the digital advisor question. On the plus side, accounts are easy to start and may have a low account minimum. However, they may take a narrow view of investments or an investor’s financial situation. And while they may provide ongoing management, most offer limited personalization. 

Also, while some investors are attracted to robo-advisors’ use of unbiased, established strategies, the range of investments and strategies is generally limited. There is no real room for active or sophisticated strategies.

Note that another way to remove some of the hassle of investing is by going through a digital platform such as Yieldstreet, which makes it easy to take positions in highly curated private-market opportunities. 

Asset classes such as art and real estate, which can provide consistent steady income, are generally less volatile, as they lack direct correlation to public markets. They also serve another crucial purpose: portfolio diversification. Constructing a portfolio with a mix of asset types and expected overall performances can mitigate risk, shield against inflation, and improve returns.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary 

What with researching investments, keeping an eye on markets, and managing holdings, investing can feel labor intensive. In that regard, robo-advisors such as Schwab, Fidelity, Vanguard, Ally, and eTrade offer services that some investors may find attractive. 

In choosing such an advisor, investors should look at financial aspects such as account minimums and fees, as well as investment options and strategies. They should also consider support and security features. Ultimately, investors should focus on what is important to them.