If you are looking at investing in securities, but don’t want to pay the fees to hire a professional to manage your investments, consider a robo-advisor. Robo-Advisors, such as Betterment or Wealthfront, offer access to investment advice and often deliver better returns for a lower cost.
With the stock market on a roller coaster ride for 2019, beginning investors can be reluctant to dive in and stomach the ups and downs. With smart investing requiring basic finance skills, it is tempting to hire a professional. But with steep fees and a perception that one needs a big portfolio to get that kind of investment advice, many have chosen to sit out and miss out on the recent market gains. Robo-advisors, such as Betterment and Wealthfront, have cropped up offering access to investment management advice for people with a lower net worth and for a lower cost than traditional financial planners. But what do robo-advisors do? And which one is better – Betterment or Wealthfront?
What is a Robo-Advisor?
According to Investopedia, robo-advisors are a “class of financial advisor that provide financial advice or investment management online with moderate to minimal human interaction”. Using a complicated algorithm or investment platform program, a robo-advisor creates a portfolio of exchange-traded funds (ETF’s) using sound investment principles. Investment choices are based on how much risk you can tolerate, what level of returns you would like to see, your goals for the money and when you want access.
Advantages of Using a Robo-Advisor
The biggest advantage to using a robo-advisor is ease – advice is available 24-7 on your computer or smartphone. Trades, purchases and portfolio changes can be made with a click of a few buttons rather than having to fill out paperwork in an advisor’s office. The cost of using a robo-advisor is less than paying an individual – typically .2 to .5% of your annual portfolio balance as opposed to 1-2% and the potential for additional commissions. While investment professionals often require a minimum balance before they will work with a client, robo-advisors often have no minimums, causing them to be accessible to beginning investors or those with a lower net worth. While there are a variety of robo advisors available, two of the largest and most recommended are Wealthfront and Betterment.
Wealthfront, the second largest robo-advisor in the country, is rated “one of the best robo-advisors” by Investor Junkie. Wealthfront offers “goal-based investing” using a portfolio of low cost index funds. Its software maintains a good investment mix, executing trades so that the portfolio stays balanced and offers “tax-loss harvesting” to lower taxes paid on gains. One of the biggest advantages of Wealthfront is the low fee – .25% – is less than the industry average with no trading commissions. Portfolios over $10,000 are managed for free with portfolios over $5,000 managed for free with a referral. For those still dealing with college costs for children, Wealthfront offers a 529 Plan option and college planning tools. Accounts can be started for as little as $500 making Wealthfront a good choice for beginning investors. While most robo-advisor accounts are not insured, Wealthfront offers a level of protection by the Securities Investor Protection Corporation (SIPC). The biggest disadvantages of Wealthfront is its emphasis on automated investing and lack of access to human advisors if needed and the fact that it does not offer fractional shares in its funds.
As the granddaddy of robo-advisors, Betterment has options that many of its competitors do not such as opportunities to buy fractional shares in funds, custom asset allocation based on your risk profile and account type, a “socially responsible investing portfolio option,” and the Black Rock Target Income Portfolio specifically designed for retirees. Betterment provides tax harvesting and allows its clients to donate shares directly from accounts to charities saving capital gains tax. But one of the biggest advantages of Betterment, besides no account minimum, is that advice from a financial expert is available 7 days per week through the Betterment App or a quick phone call. Unfortunately, this access comes with a bit higher fees than its competitors – .15 to .40%. Betterment also brags that its funds often outperform those managed by private client investors at all levels of risk.
A robo-advisor takes the guesswork out of investing but without the account minimums and high fees required by professional financial planners. Wealthfront has the advantage of more tax- efficient investing, college planning and 529 accounts in addition to no fees for portfolios over $10,000 and lower fees for smaller accounts than its competitors. Betterment has the advantage of no minimum deposit, better retirement planning and better access to human advisors. Before you take the first-time leap into investing or move your current portfolio, it helps to do your research. You can compare Wealthfront and Betterment and investigate other robo-advisors by visiting