Best Robo Advisors

In my guide to the best robo advisors, I will take a close look at the wide selection of robot and AI powered auto-investing platforms available to US residents. Including programs offered by industry disruptors and challenger banks as well as long-standing industry giants who have moved quickly to the challenges and whose efforts quickly outpaced the start-up scene including Wealthfront, Personal Capital and Betterment.

My complete guide to robo-advisors in the US explains what makes robo-advisors different, whether you can and should actually trust them, and whether they fit into a comprehensive retirement strategy.

Robo-Advisors are more popular than ever, no more so than in the US, but what are they and where did they come from?

The first robo-advisors were launched in 2008, deep in the chaos of the sub-prime mortgages crisis. In the midst of these uncertain times two new fintech start-ups were out to start a trading revolution as Wealthfront and Betterment launched their robo advisor products. These were designed to cater to a new, digital-native audience while also tackling issues that previously locked so many people out of trading and investing. These two pioneers offered lower fee services for cost savvy wealth management clients who preferred to see their investments in front of them on-demand, rather than in a quarterly summary prepared by a wealth manager.

It took a little while for the trend to go world-wide but by 2012 robo-advisors were following the US innovators and similar products were being launched in the UK, Europe, and Asia.

What is a Robo Advisor?

A robo advisor is an online investment platform that on the basis of a short survey filled in by you will determine an investment strategy that is best suited to your needs. The proprietary software of the relevant trading app will then invest and build a portfolio that is appropriate to your needs and will manage your investment. This acts as a kind of financial advice that takes place on the back of artificial intelligence and complex algorithms. It’s a hands-off approach to investing your money that allows both new and familiar investors to check in on their portfolio every once in a while, without the need to learn the ins and outs of trading on the stock market.

Technically speaking robo-advisor services are portfolio management providers as they can’t provide estate and retirement planning and cash-flow management, which are also the domain of financial planning. It’s best to think of a robo advisor as an all-in-one robo investing and wealth management solution that requires very little from the client beyond the initial questions that are used to set-up the customers risk profile in order to make investment decisions on your behalf. You won’t be making trades, and you probably won’t know whose stocks, shares, and bonds you invested in. Instead, you sit back and let the computer make the decisions on your behalf. What could be simpler?

The Best Robo Advisors for US Investors Reviewed

The best robo advisors are increasingly hard to define because there are frankly so many options to choose from with over 100 solutions available. As it stands, there is no clear front-runner among the many US products available.

There are those with significant marketing budgets and deep pockets, but as with anything biggest does not always mean ‘best.’ What’s more, there’s a fair amount of churn in the sector: both large and small US robo advisors have been known to sell up, close down, or pivot their services. For example, Personal Capital’s $1 billion sale to Empower Financial in 2020 and Wealthfront’s sale for $1.4 billion to UBS earlier this year, leaves very few of the punkish upstarts from the early days operating on their own.

What’s most important is to do your research and determine what platform caters best to your needs and investment goals. Your top-tier of products may differ significantly from others’, and that’s not only okay, but it’s to be expected.

The most important thing is to find a product that enables you to grow your wealth as it currently stands. In addition to finding the best robo advisors to meet your needs, it’s also important to seek out a provider that’s generally reputable.

In other words, they should not only have the relevant paperwork with the appropriate US regulatory bodies, but a history of good governance, experience in economics and finance, and a strong showing of support from their own investors.

What Products Do Robo Advisors US Offer?

The best robo advisors offer both general investment or a trading account as well as a number of the popular retirement and loss harvesting to help minimize your tax bill. The typical robo advisor may provide some if not all of the following products:

• socially responsible investing (SRI)
•  tactical strategies that mimic hedge funds
•  tax-loss harvesting
• investment selection
• retirement planning

How Does a Robo Advisor Work?

Robo advisors in the US use an algorithm to choose your investment portfolio based on things like:

•     Your risk profile
•     Your current investment goals
•     Your projected investment term

Because you won’t do any trading on your own, and you won’t have a human advisor doing any trading on your behalf, your portfolio usually comes in the form of different funds rather than individual stocks and bonds.

Most investment platforms use a theory called the Modern Portfolio Theory (MPT), aka mean-variance analysis, for which economist Harry Markowitz was awarded a Nobel Memorial Prize in Economic Sciences. MPT is used to create portfolios that the survey then assigns to each customer based on the three data points above (risk profile, financial goals, term). MPT argues that you can create an “efficient frontier” of portfolios optimized to generate the best available growth for each level of risk.

Put simply MPT is the theory that risk and return evaluations should not be undertaken on an individual basis but rather evaluated against the entirety of a portfolio for optimal performance. The theory operates on the presumption that all investors are risk-averse by nature and would prefer a portfolio that offers low risk with a reasonable return, and investors only want more risk if the possible growth at the very least matches this risk rise.

What does it mean in terms of a robo advisor’s portfolio offering? It means a significant focus on an instrument known as an index-based exchange-traded fund (or index-based ETF). However, some US robo advisors will also use mutual funds as part of their portfolio construction.

What Are Index-Based ETFs?

Indexed-based ETFs are ETFs that track the performance of an index (like the NYSE or NASDAQ). Indexes track a targeted group of companies that reflect the growth of the overall market. Thus, an index-based Exchange Traded Fund attempts to provide investors with a return that reflects the subset of the market they’re tracking.

Why are index-based ETFs such a popular addition to a portfolio among robo advisors in the US? First, they’re low cost, getting rid of human advisors has helped pass on big savings to consumers. Second, there’s a ton of investing research underpinning their use within a portfolio; they offer a favourable return compared to tools like fully managed mutual funds both in the short-term and long-term. In fact, research from two key players in the US robo-investor market found that index-based ETFs outperform mutual funds 80-90% of the time. As a result, robo advisors offer both a low-cost and efficient form of investment that also happens to offer a long list of other benefits.

What About Mutual Funds?

Mutual funds use active fund management in an attempt to produce better returns and beat the stock market. As a result, they aren’t found among robo-investors which demand a more passive role to function. Some providers who offer robo advisor services may offer mutual funds as a separate product. Because mutual funds demand active management from a human advisor, the management fee is higher.

As a result, they don’t cater to the crowd who would prefer to accept computer-driven investment service in favor of a lower management fee. The difference can be significant: you could spend 1-3% on management fees on a mutual fund but a robo advisor could charge you as little as 0.25%.

Who Do Robo Advisors in the US Help?

In the past, access to trading was largely limited to those who either had the knowledge to go it alone or those who could afford to pay a financial advisor service to work on their behalf. It was also limited to people whose initial investment amount was large enough to meet the high entry fee — an artificially high barrier designed to keep out the everyday saver or new investors getting started with their portfolio.

Robo Advice turns existing financial services products on their head by combining a low management fee with almost no artificial restrictions on investment requirements.

Robo advice can help manage your tax-deferred investments, like your Roth IRA and your 401k, and then a general investment account once you max out your annual contributions.

How Much Does a Robo Advisor Cost?

Whilst the cost of a US robo adviser is significantly less than what you would expect to pay a human financial adviser, there is a management fee involved the actual cost of which can differ greatly from one investment service to another.

Usually, the pricing model consists of two major components that you need to worry about, the portfolio management fees which is usually a percentage of your annual investment and typically costs anywhere between 0.25% to 0.5% and the Fund Fees which can be anywhere between 0.05% and 0.65% of your annual investment.

Some robo advisers will use a sliding scale fee structure based on your annual investment amount so it is worth checking which bracket you would fall into before attempting to calculate your costs. This sliding scale can also make it worth changing from one robo adviser to another once you have grown your money so check there are no withdrawal fees associated with the robo adviser you choose.

Which is the Cheapest Robo Advisor in the US?

Low fees shouldn’t be your main consideration when surveying the large choice of robo-advisor platforms out there. That said it is an obvious factor that stands out and differentiates one platform from another. For that reason, I have conducted a price comparison of the major US robo advisors on the market today so you can see which is the cheapest robo advisor. There are many variables to consider when it comes to how much money robo advice will cost, such as the minimum investment amount offered by the robo advisor, which account is best suited to your needs, and the robo advice services that each of the various US robo advisor offer.

Many of the US robo advisors have hidden fees, such as deposit and withdrawal fees, set-up fees, trading fees, transaction fees, and exit fees associated with the robo advice they provide. However, SoFi has $0.00 investment management fee and asks that you deposit just $1 to open an account and $5 to begin investing. This coupled to its low ETF expense ratios, ranging from 0.02% to 0.08%, are why I have picked SoFi as the cheapest US robo advisor available.

Should You Use a Robo Advisor?

A common misconception is that robo advice generally isn’t for clients interested in investing in wealth accounts or high-net worth clients. Early versions of the consumer-facing product saw that not only were the premiums not optimized for high-value retail investor accounts, but there was no real oversight from humans, which many considered as being essential.

What’s more, robo-advice tended to be inflexible; you couldn’t maximize your investment nor will you have any sort of detailed or personalized financial advice. This slowly but surely is changing and while its true that some robo advisers currently on the market do fit the above description and use it as their value proposition, an increasing number of investment platforms are integrating a host of other financial services to supplement their computers’ robo advice. In other words, you’re not only more likely to now see clients with $100,000+ using robo advisors for at least part of their portfolio, but financial managers are also enlisting them on their clients’ behalf.

Is There Anyone Who Won’t Benefit from a Robo Advisor?

At present, robo advisers won’t directly benefit those who aren’t transferring money into their accounts regularly. Although they are often one of the cheapest methods for getting a foothold in the markets, the management fee will likely eat up much of the return in small accounts where the investor only adds $10 at a time.

These customers can use the product, but they might be better suited with cash savings options that feature no-to-low fees, using this option to help build a cash nest egg for investment. Investing with a robo advisor is a long-term proposition and therefore customers looking for short term gains on their money would be better off placing their money in a high interest, easy access, cash savings account.

Do Robo Advisors Beat the Market?

The simple answer to this is that even the best robo advisors rarely manage to beat the market, however, even matching the market can lead to strong returns in the long-run. Also, it should be noted that beating the market is not a realistic expectation, financial gurus make lucrative careers on beating the market just once. The index fund investing strategy that is followed by most robo advisers will often match market performance, but more importantly, offer investors a less volatile portfolio during economic upheaval. A financial advisor will also struggle to beat the market, and in some instances a robo advisor has actually out performed its human counterpart at less cost.

Are Robo Advisors Suitable for Wealth Management?

Many of the best robo advisors both in the US and in the global industry generally tout themselves as being perfect for small investors. Their low management fee combined with low investment thresholds do cater to that group.

But are robo advisors also suitable for investors with $200,000 or more to transfer into an account or is traditional wealth management still a better option? While some robo advisers exist to cater to small investors, there are products available for investors with accounts worth six-figures or more. What’s more, industry experts say that robo advice products are becoming more popular across wealth levels, with many high-net worth individuals choosing to split their money between wealth managers and computer advisors. The practice is more popular among Asian and Latin American investors than North American and Europeans, who are slightly more cautious.

The sector’s willingness to expand its core market is important not only for gaining today’s wealth customers but also because as the global Silent Generation and the Baby Boomers, upon their death, will transfer an estimated $30 to $68 trillion to adult children.

It’s important for robo advisers to be ready for a generation of investors who are already comfortable with using digital services rather than traditional wealth managers, but who don’t yet have a high net-worth.

Can You Trust a Robo Advisor?

“Can we trust the robots?” It’s a good question that I will try to answer without going into the complex world of robotics, ethics, and the First Law of Robotics. That said it’s a question that should be raised after all, you wouldn’t give your money to a company without making at least some due diligence research and investing money is a risky business even for the safest and most reputable of investors. So, short answer is yes and the long answer and explanation follows.

Why?

Well, the decisions made by the robo-advisor are decisions it makes on the basis of a combination of AI and algorithms and whilst these may be incredibly complex they are also neutral, objective and free of emotion. The theory powering the logic behind the average robo advisor, is based on the Modern Portfolio Theory (MPT), aka mean-variance analysis. This theory helps construct “safe” portfolios, though with the long-term in mind. The use of an algorithm to make an investment strategy also means that there won’t be any sort of emotional decision making. Your portfolio won’t suffer because someone is having a bad day or even worse had a good night and then in their morning haze hit the wrong button.

Further evidence of the value of robo advice comes from the fact that they are increasingly used as a “white label” practice. Traditional advisors are increasingly using them for client work to streamline the asset selection investment process and free up their time for more valuable work. So, these products aren’t just for those locked out of the market: they have value for industry professionals, too.

Finally, any trustworthy robo adviser will have authorization from the Securities and Exchange Commission (SEC) and most of the robo advisor platforms are also registered with the Financial Industry Regulatory Authority (FINA).

Look for approval from both bodies before you provide your details to any start-up.

Can Robo Advisors Make You Money?

Robo advisers have raised a degree of skepticism among professionals as to their effectiveness when compared to traditional investment methods. That said they rely heavily on complex algorithms which are based on sophisticated economic research and therefore represent the best economic models of investing.

Competition within the robo advice market has led to low fees, which in turn means an increase in investor returns. Of course, there are variables and any fees can erode away at small investment amounts, however, they can effectively make you money in line with your risk appetite.

Does the Robo Advisor Hold onto My Money?

The answer is probably not, particularly among start-ups. Many of the independent robo advisers aren’t investment banks. They offer software and serve solely as a platform offering robo advice. Your money will likely be held by a custodial broker.

It’s worth doing research on the custodial broker or partner bank before opening an investing account with the best robo advisor for you and investigating where your money will be held so you can ensure the safety of your money should the robo adviser go bust.

What are the Benefits of Choosing a Robo Advisor?

Robo advice comes with a long list of available benefits, which is no surprise given their stratospheric success.

Cost Effective with Good Returns

The biggest benefit offered is their premise: they offer quality investment tools at low cost, which is a proposition that’s difficult to execute. As mentioned above, robo advisors accomplish this by using a MPT theory and relying heavily on index-based ETFs, which provide low-cost performance. Although this benefit often speaks to new investors, it’s a helpful tool for those with mature wealth who want to further diversify their portfolios.

A robo adviser is a low-maintenance place to park a portion of your money and watch it grow and enjoy the cost savings compared to typical asset management fees.

Easy to Use

What attracts everyday savers who don’t have a wealth of investing experience is how easy they are to use. All you have to do is open an account which is usually very simple. Though, you can expect to provide a list of essential details to ensure compliance with the IRS and US law. From there, you can link your bank account and set up a direct debit to invest as much money as often as you like. Additionally, robo-investors allow you to choose a portfolio based on your financial goals and your preferred investment risk tolerance, which means there’s no research involved.

Quality providers also provide enough easy-to-digest information on their websites to educate all their customers on what’s happening behind the scenes. Their resources can be a good starting point for further investments and diversification as your cash grows.

Automated Rebalancing

Once you’re set up, you can largely forget about it. Though, it is good to check in on your investment and update your risk tolerance and goal preference based on performance but also changes in your circumstance. The best robo advisors even automate the rebalancing process, which ensures that your investments and mix remain constant even as markets change.

Low-to-No Minimum Balance

Another benefit is the ability to keep a low minimum balance both as you start out and if you need to withdraw your cash. You won’t lose access to your account even if it sits empty. Not all accounts offer this feature. Start-ups are more likely to allow this compared to legacy banks.

Are There Any Disadvantages?

While the list of benefits is long and attractive, there are some drawbacks associated with robo advisors that are worth considering. The biggest of these is the lack of personalization (at least so far) in the robo advice they offer. These providers shuttle everyone into one of a handful of portfolios based on some general questions. While this approach has some merit (and there’s sound science behind it), it’s important to remember that there’s more to your financial goals than a basic risk profile.

Some robo advisors are increasingly offering a greater degree of personalization to address this. You can also switch your risk levels and change your investment goals among some providers.

A second disadvantage is that you won’t get any financial advice when there’s a big market swing. For example, the pandemic based free fall in early 2020, caught robo platforms off-guard and investors were on the phone with their money managers wondering what to do next.

If your plan is strictly run by a computer, you won’t have anyone to tell you not to sell up — or what to do next. You’ll need to make the decision for yourself and hope it’s the right one. Finally, it’s important to remember that while some robo advisors offer lower fees than financial advisors, not all do.

There are many products and advisors out there. Avoid following the assumption that even the best robo advisor will save you money in every instance because that’s not true.

The bottom line is there are many things the best robo advisors have the potential to do better or cheaper than a human.

The key is to remember that they have the potential: not every product or platform will live up to it.

How Much Will You Make Compared to a DIY Approach?

There’s no way to say just how much you’ll earn via the best robo advisor compared to a mutual fund or buying stocks and bonds individually. Every part of the robo advice process is unique, and of course, the stock market changes in ways that are not always predictable.

It’s worth noting that you won’t necessarily earn as great a return with the best robo advisor compared to a DIY approach. The portfolio building process combined with the prevalent use of ETFs means that your portfolio will match risk with reward. When might you earn more by choosing to build your own portfolio? You’re likely to see better returns when:

•     You already have investment experience and knowledge of the stock market
•     You have the time to manage your own investments
•     You have time to seek out and manage low fee investment platforms

But if you’re a new investor, have little time to dedicate, or just want to watch your money (hopefully) grow steadily over time at a rate that should beat a savings account, then you are more likely to prevail with a robo advisor.

Robo Advisor US Fees Comparison

We recommend that you fully understand the fees before signing up to a US robo-advisor, so we have put together this handy robo advisor comparison table for you.

Some of the fees you need to understand that will apply when investing with a US robo advisor include:

Platform Fee* – The fee charged to use the robo advisor US platform you have chosen. In most cases this is shown as an annual percentage fee and is charged against the total amount you invest each year. As an example, a $1,000 investment with a robo advisor that charges 0.6% means you would pay $6 per year to use the platform.

Fund Fee** – The fee which is charged by the underlying fund or ETF that you’ve invested in. This fee is passed to the Rob Advisor and subsequently onto you.

Which Robo Investor Has The Best Returns?

Knowing the historical performance of the robo advisor you are considering is of course important before making your choice, however, historical returns cannot guarantee future performance so I would urge investors to consider other factors such as minimum investment, management fees and the products on offer before making their selection.

The other thing to consider is that investing is a long game and generally investors are encouraged to leave their investments for a minimum of five years in order to see any real gains on the original amount of money. This is due to the ebbs and flows of the stock market, with some years proving particularly volatile.

Because many of the robo advisors have entered the market within the last five years, it makes it very difficult to quantify which of the current offerings is performing best, however, my research has shown that SoFi has one of the best performing robo-advisors in the past few years with 2.5-year annualized return data providing growth of 4.03%. This is a great result over a relatively short time period.

Are All Robo Advisors the Same?

No, each US robo advisor operates according to its own proprietary software as well as its own platform rules. Robo advisors may assess different fees, offer unique funds, and may provide a different array of services.

Is a Robo Advisor Worth It?

The market for robo advisors has grown substantially over the course of recent years, largely as they provide access to the financial markets to new investors and people with a small investment pot. They also offer a low-cost alternative to traditional financial advice and adherence to the latest research for investment performance means they are often a high performing option. That being said, robo advisors are not in any way personalized, and therefore cannot take your unique circumstances into consideration when it comes to investing. However, if you are after a simple, time and cost-efficient means to investing then robo advice is an excellent choice.

How to Choose a Robo Advisor

Because robo advisors largely offer the same value propositions and use the same technology, choosing between them comes down to the smaller details, like pricing and investment service offering. Some of the things to consider include:

• Management fees
• Investment options
• Services
• Access to human advisors
• Types of accounts
• Minimum lump sum investment

The same rule applies to robo advisors as it does to any other financial account: the management fees don’t tell the whole story. It’s helpful to sit down and determine what’s most important to you. Are you looking for a place to dip your toe into the water? Or are you looking for somewhere to start growing your wealth in earnest? Robo advisors can offer both, but you’ll need to assess each platform’s offerings against your own financial goals to understand whether they’ll work for you.

What Happens If a Robo Advisor Goes Out of Business?

A robo advisor effectively acts as an intermediary between you, the customer, and the custodian which is where your money is actually held. This means that in the event that your robo advisor goes bust, your money will still be safely held with the custodian and will remain untouched. It is then up to the customer as to what you would like to do with your money. As well as this, most robo advisors will be part of the Federal Deposit Insurance Corporation (FDIC), in the unlikely event that your robo advisor goes out of business.

Common Robo Advisor Terms Defined

What is an Investment Portfolio?

An investment portfolio is a group of financial investments, predominantly made up of stocks and shares, bonds, commodities, cash, funds and ETFs. Historically a portfolio would be built by a financial advisor, however, with a robo advisor an algorithm is used to provide an asset allocation of diversified investments grouped together within robo advisor portfolios that meet your financial goals and your risk profile.

When choosing your best robo advisor it is important to ensure that you are happy with the portfolio choices. A well-diversified portfolio can help mitigate your exposure to risk with a vast range of asset classes. Whilst the exact construction of each portfolio will vary, you should look beyond simple portfolio construction and understand the type of investments within.

What Are Ready Made Investment Portfolios?

Ready-made investment portfolios are a staple of the robo advisor universe, and they’re increasingly used by traditional financial planners as well. A ready-made portfolio is the equivalent of an ‘ready-to-wear’ suit. You try one on, and if it fits and you like it, then you walk away with it that day. You don’t need to decide the details of the collar or the cuffs. It’s ready to go. Another person can come in and buy the exact same thing, if they like it. In most cases, the portfolios are designed by the investment team behind the company. They do the research to ensure the portfolios minimize risk and maximize return in each instance. Most ready-made portfolios contain a diverse combination of investments contained in a single fund.

You might also find that some providers offer ‘themed’ portfolios. For example, ‘green’ or ‘sustainable’ portfolios are a trend. If you prioritize investing only in companies that are environmentally-friendly, then choosing one of these portfolios means you won’t be a shareholder in a company that doesn’t align with your beliefs. While there’s usually a team of people behind the curation and maintenance of each portfolio, they don’t do the trading.

Guide to Best US Robo Advisors Conclusion

Robo advisors initially made their mark as a low-cost, low-barrier product that allowed a new generation to invest in the financial markets. However, as these products have grown both in scale and scope, they now appeal to more than the new saver. Even those who can and do afford wealth management consultants are increasingly using robo advisors to manage some of their portfolio.

The benefit of using a robo advisor is that these products typically use tried-and-tested theories to create robo advisor portfolios. Each portfolio is optimized for long-term growth and a suitable amount of risk. What’s more, good products will have all the appropriate backing from the relevant financial authorities such as the FDIC, which means your initial investment is protected should the provider go bust.

Robo advisors aren’t a one-size-fits-all solution. Indeed, so many products now exhibit meaningful differences. However, if you are interested in using a low-maintenance form of investment, the time spent researching providers will likely be worth your while.