Your financial life could improve by leaps and bounds with the best robo-advisor working for you.
Less than half (46%) of Americans don’t even own stocks, according to a 2017 Gallup report, so a robo-advisor will put you ahead of the curve in a hurry.
You’ve likely heard a lot about these so-called “robot” investor services. But what’s fact and what’s fiction?
What is a robo-advisor? How does a robo-advisor work? Should I use a robo-advisor?
Don’t worry, we’ll be answering all of these questions and more in a second.
But before we tell you about the very best robo-advisor, it’s important you learn a bit more about what exactly they are, why they’re so valuable and how the right one can even save you money on taxes.
Robo Advisor FAQ
Human behavior is one of, if not the, biggest impediments to financial success, according to a 2010 Securities and Exchange Commission bulletin. But that should come as no surprise.
Nobel Prize winning research has proven we have deep, behavioral biases. We seek to validate existing beliefs, get overconfident, excited, hopeful, doubtful, et. al.
We like to think we’re 100% rational and only act based on logic and reason, but that’s just not how we work.
Insert the robo-advisor.
What Is A Robo-Advisor?
A robo-advisor is online software that manages investments using mathematics and algorithms. Robo-advisors invest based on personal preferences, desired returns, risk tolerance, and other factors.
These sophisticated tools can even execute trades on your behalf, minimizing your tax burden through a process called “tax-loss harvesting” (more on that later).
Robo-advisor software does all this with virtually no human intervention, and this software can invest you in everything from stocks and real estate and much more.
Should I Use A Robo-Advisor?
If you’re handling investments for an entire company, have a complicated tax situation, or have multiple, complex investments all in tandem you should probably opt for a financial advisor.
However, if you’re a new investor, have never invested before, or are too busy to manage your portfolio yourself, a robo-advisor is ideal.
If you don’t want to have a financial advisor, don’t have enough money to pay a financial advisor, or can’t find a financial advisor you can trust, (remember that tidbit earlier about human behavior?) then a robo-advisor is also ideal. Do-it-yourself investors can also benefit from a robo-advisor as a way to help balance their portfolio.
The fees you’ll incur using a robo-advisor can vary wildly.
Some companies are capitalizing on the surge in consumer interest by charging exorbitant fees. (But don’t worry, because the best robo-advisor charges a percentage per year so small it’ll shock you).
Some fixed fees, ranging from $20-$50 bucks a month, to $500 or more. Others charge a percentage based on your asset size, ranging from .15% to .50% or more.
The very best robo-advisor, Wealthfront, uses what’s called a “tax-loss harvesting” service to significantly improve the after-tax return of any taxable accounts. How do robo-advisor taxes work? If you’re using Wealthfront, they’re able to take advantage of market movements to capture investment losses.
Here’s an excerpt from their Wealthfront Tax-Loss Harvesting white paper:
“Tax-loss harvesting (TLH) works by taking advantage of investments that have declined in value, which is a common occurrence in broadly diversified investment portfolios.
By selling investments that have declined below their purchase price, a tax loss is generated – which can be used offset other taxable items, thus lowering the investor’s taxes.”
Tax-loss harvesting is just one of the many benefits of using Wealthfront, and why they’re the best robo advisor, hands-down. Started back in December 2011, Wealthfront now has more than $10 billion of assets under management.
Compared to Betterment, the other best robo-advisor (which you can learn more about it in our Betterment vs Wealthfront story), they take first place. Here’s why:
Wealthfront fees are some of the lowest in the robo-advisor industry. At 0.25% annual advisory fees, a $100k investment account would pay just $20.55 per month. Plus, if you’re balance is under $5000, your account will be managed free, but they do have a $500 minimum.
Why does Wealthfront have a $500 minimum? Because they want to provide an optimized allocation across seven or eight asset classes. This makes sense, and wouldn’t be possible with smaller account size.
Wealthfront doesn’t charge opening, closing, trading, commission, or transfer fees.
It’s just one of a laundry list of reasons why Wealthfront is the best robo-advisor:
It’s an uncanny value for investors.
Although Wealthfront doesn’t offer a 401k account, they offer 9 others: Taxable, Joint, Roth IRA, Traditional IRA, Rollover IRA, SEP IRA, Trusts, Non-Profit, and 529s.
Wealthfront offers a cash account that pays 2.24% interest and carries full FDIC insurance.
And here’s another reason why we picked Wealthfront as the best robo advisor: because they offer a completely free financial planning tool, Path. So you can get a clearer picture of your finances, it syncs with all your accounts, Wealthfront or not (so no strings attached).
Wealthfront Sign-Up Process
Like every legit robo-advisor, Wealthfront is going to start the same way: with a series of questions to learn about your investing style, risk tolerance, and other factors. You’ll have to provide the following basic information:
- What are you looking for in a financial advisor?
- Your annual income, social security, and birthday
- Current household status (i.e., single income, no dependents; dual income; retired, etc.)
- Answer a volatility statement.
It says “because the stock market is volatile if you were to lose 10% of your balance or more, what would you do?”
It will prompt you with several choices, like whether to buy more, sell more, hold or abandon ship. Again, this is to help determine your risk-tolerance level. Depending upon your responses to these questions and the others, you’ll fall into a risk grade between 1 to 10, 10 being the highest.
This risk grade will determine how your investments will be allocated.
But this plan is fully customizable, so don’t stress too much about the result.
You’ll be vested in a mix of U.S. stocks, foreign stocks, emerging markets, real estate investments, and others. Again, these will vary based on your profile and are fully adjustable.
Once you’ve settled on the right investment allocation strategy, you’ll be prompted to fund your account via a bank account. Sorry, no funding your Wealthfront account with a PayPal, money order, or anything like that. They accept deposit dash (ACH bank transfers) only (and checks for 529 accounts, only).