Robo-advisors continue to gain popularity and present an automated and low-cost alternative to human-managed portfolios. They generally cater to smaller portfolios, rely primarily on ETFs, and use algorithms to determine portfolio allocation tailored to investment goals.
I have reviewed dozens of robo-advisors and created my list of best options, plus a quick guide on everything you need to know before making your first robo-advisor investment.
- Robinhood, Mobile-focused equity and crypto broker.
- E TRADE, a one-stop financial firm with banking services.
- Ally Invest, A one-stop banking and investing solution.
- SoFi Invest, Fee-free financial planning / robo-advisory.
- Vanguard, Second-largest ETF provider globally..
- Fidelity, Commission-free trading / investing.
Robinhood
In Summary Mobile-focused equity and crypto brokerMost know Robinhood for its commission-free trading and fractional share dealing from $1 with an on-ramp for cryptocurrency traders on its mobile app. Robinhood also ventured into the robo-advisory sector with its retirement portfolio builder. It is free, but the drawback is that Robinhood provides only one custom-recommended portfolio. Robinhood offers a 1% bonus on retirement account transfers and a time-limited 3% bonus for Gold members.
Millennial and GenZ clients account for most of the Robinhood customer base. Therefore, I rank Robinhood among the robo-advisors ideal for first-time retirement planners, as it offers a popular way to get started.
Pros & Cons
- Quality education for beginner traders
- Balanced asset selection for equity and cryptocurrency traders
- A dedicated cryptocurrency account
- User-friendly and highly rated mobile app
- History of SEC investigations and fines
E TRADE
In Summary a one-stop financial firm with banking servicesE*TRADE provides low-fee robo advisory services under its Core Portfolios offer. The minimum investment to participate is an above-average $500, and the annual management fee is 0.30% or a minimum of $1.50. I rank E*TRADE among the cheapest robo-advisors owned by a major financial institution.
Morgan Stanley Smith Barney LLC (MSSB) manages Core Portfolios and uses algorithms to determine a recommended portfolio based on an 11-step investor profile and suitability application. Morgan Stanley Wealth Management (MSWM) uses Modern Portfolio Theory (MPT) to recommend ETFs, with daily checks for portfolio rebalancing opportunities if portfolios move 5% away from target allocations.
Pros & Cons
- Excellent education and research for beginners
- Commission-free trading and balanced asset selection
- Cutting-edge trading platform and user-friendly mobile app
- Excellent order execution and price improvement technology
- Limited payment processors
Ally Invest
In Summary A one-stop banking and investing solutionAlly Invest combines human portfolio managers with robo-advisory services. The combination creates an intelligent approach to creating ETF-based portfolios. Therefore, I rate Ally Invest among the most innovative robo-advisors. The minimum investment requirement is only $100, and the four Ally Invest portfolios are Core, Income, Tax-Optimized, and Socially Responsible.
Investors can choose between the cash-enhanced portfolio and the market-focused funding method. The former has zero advisory fees, sets aside roughly 30% of the client portfolio in cash, and pays an annual interest rate. The latter has a 0.30% annual advisory fee, and all robo portfolios have fee-free rebalancing.
Pros & Cons
- User-friendly Ally Invest mobile app.
- Robo portfolios and traditional wealth management
- One-stop financial institution for all banking requirements
- No support for demanding trading requirements
- Limited payment processors
SoFi Invest
In Summary Fee-free financial planning / robo-advisorySoFi stands out as it does not levy advisory fees, making it my top choice among robo-advisors for first-time investors. The minimum investment amount is only $1, and it offers clients financial advisors for one-on-one discussions of big-picture financial goals without any costs. Clients can have multiple robo-portfolios depending on their goals, which makes it a popular service among younger investors.
Auto-rebalancing is available, ensuring robo-portfolios deliver on the preset goals. SoFi investors also benefit from rate discounts on other SoFi products, exclusive events, social activities, and at-home experiences, making SoFi a one-stop financial solution for many younger clients.
Pros & Cons
- Robo-advisory from $1 without advisory fees
- Low fees and free access to investment advisors and career counsellors
- Not suitable for active investors or more demanding traders
- Low-quality investment platform
- Limited asset selection of equities, ETFs, and options
Vanguard
In Summary Second-largest ETF provider globally.Vanguard belongs to the Big Three index fund managers in the US. Offering robo-advisors was a natural step for this market leader in passive investments. I rank Vanguard among the most established robo-advisors, but it has a high minimum investment amount of $3,000 to enroll in its Digital Advisor with an advisory fee between 0.15% and 0.20%. Investors get 90 days for free before the advisory fee applies.
The three core robo-portfolios at Vanguard are All-index investment, Active & All-index investment, and ESG investment. The robo-advisory service at Vanguard uses primarily Vanguard ETFs, and Vanguard also offers tax-loss harvesting.
Pros & Cons
- Broad-based asset selection for passive investors
- Numerous assets remain commission-free with an overall cheaper cost structure
- Vanguard maintains a basic investment platform
- Some mutual funds require a minimum transaction size of $3,000
- Limited research and education offering
Fidelity
In Summary Commission-free trading / investingFidelity brings its asset management expertise into the digital age with its robo-advisory service, Fidelity Go. It does not charge advisory fees on portfolios below $25,000, making Fidelity my top choice among robo-advisors for investors with small portfolios. Once investors grow their wealth above $25,000, Fidelity charges 0.35% annually, which includes unlimited 30-minute phone consultations with advisors.
There is no minimum investment to open a Fidelity Go account, but the minimum amount to start investing is $10. Investors can select from eight risk settings, but unlike many competing robo-advisors, Fidelity uses its Fidelity Flex mutual funds rather than ETFs.
Pros & Cons
- Wealth management and robo-advisory services
- Commission-free equity and ETF trading
- Superb independent research
- Outstanding choice of equities, ETFs, and mutual funds
- Expensive margin rates for traders
What are Robo Advisors?
Robo-advisors use algorithms to recommend, execute, and maintain investment portfolios. Many robo-advisors have human financial planners to create the guidelines, while algorithms handle the day-to-day management. Therefore, advisory fees are lower and sometimes non-existent.
How Do Robo Advisors Work?
Investors must complete a short questionnaire so robo-advisors know the goals, time horizon, and risk tolerance. Robo-advisors select from a limited choice of ETFs, and sometimes index or mutual funds, pre-selected by a human financial planner.
The tasks of robo-advisors include:
- Maintaining pre-defined asset allocation
- Rebalancing portfolios as necessary
- Dividend re-investment (if provided)
- Tax-loss harvesting (if provided)
- Round-up investments (if provided)
Average Performance of Robo Advisors
While many investors associate robo-advisors with super-charged portfolio performance, a Vanguard survey showed the average five-year performance of robo-advisors ranges between 2% and 5%.
Investors must know that human financial planners create a guardrail for the algorithm to maneuver, making portfolios algorithmically executed human strategies with an extremely narrow focus. They are ideal for a low-cost, low-risk ETF-based portfolio among first-time investors, but investors with more capital will find more profitable long-term solutions.
Robo Advisors vs. Financial Advisors
Robo-advisors have lower fees, while financial advisors generally have better returns, but it depends on the team behind robo-advisors and the financial advisor. In most cases, an index fund strategy beats the performance of robo-advisors and financial planners. Robo-advisors offer an excellent on-ramp to asset management due to their low minimum investments and fee structure, but financial advisors can provide better value for higher fees.
Robo Advisors vs. Index Funds
Most investors will beat robo-advisors with index funds, which they can manage fee-free in their brokerage account. Some robo-advisors may outperform index funds occasionally, but long-term performances of 80%+ of managed funds underperform their benchmark index. Buying and holding an S&P 500 index fund can outperform many robo-advisors and financial advisors.
How Much Money Can You Make with Robo Advisors?
While it depends on robo-advisors, the team creating the algorithms governing boundaries, day-to-day management, and investment choices, most robo-advisors fail to exceed 5.0% in annual returns on a consistent long-term basis. Exceptions exist, which makes in-depth due diligence crucial before committing capital.
Robo Advisors - Pros & Cons
Investors should consider the pros and cons of robo-advisors before deciding if and how they fit their overall approach to portfolio management.
The pros of robo-advisors include:
- Low fees
- Minimum investments from $1
- Easy to track investments
The pros of robo-advisors include:
- Limited investment options
- Lower annual returns
- Lack of innovation despite the name
- The limited portfolio choices fail to suit every investor
- Lack of fine-tuning portfolios
Bottom Line
Robo-advisors are OK for investors with smaller portfolios and offer a low-cost fund management experience. While robo-advisors use algorithms and computers, they fail to provide a disruptive approach to long-term portfolio management. Robo-advisors usually follow the Modern Portfolio Theory and rely on a limited number of ETFs chosen by financial planners, their biases, and their market knowledge.
