5 Tips For Choosing The Right Robo-Advisor

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If you are uncertain how to manage your finances…….

and do not want to hire a financial advisor, try “hiring” a robo-advisor.

In this week’s article, we’ll talk about what a robo-advisor is, why you might want to use one, and how to pick the right one for you.

What Are Robo-Advisors?

For those not familiar, robo-advisors are digital platforms that provide automated, algorithm-driven financial planning and management services. Some robo-advisors are a hybrid brokerage firm since they not only provide analytical information, but they also provide human supervision and offer a human financial advisor that you can talk to about your questions. Others are a “pure” robo-advisor service that strictly provides pure analytical information and advice as well as automatically invest for you.

Initially, these digital investment platforms only provided access to a set of asset allocation portfolios based on a person’s risk tolerance.

How to choose robo-advisor for you

Over the course of its evolution, robo-advisors have grown to not only offer automated services, but these companies have also started to offer human advisor-based client services.

Since the first robo-advisor launched in 2008, automated investment and management services have grown tremendously.

Once considered novel, but now seen as standard, robo-advisors have cemented their place in the investment landscape to the point where independent offerings such as M1 Finance, Betterment, and Wealthfront have been lapping up investments from old-school brokerage firms.

Due to this disruption in the financial industry, many old-school brokerage firms (think, Vanguard, Charles Schwab, etc.) now have an online advice arm to compete with these new firms.

How Do Robo-Advisors Work?

To get started, most robo-advisors ask you a few questions to understand your financial situation, future goals, age, and risk tolerance. They do not directly ask you your risk tolerance level because, honestly, who know what their personal risk tolerance really is. Instead, robo-advisors will ask you questions (i.e. how you feel when the market has a downturn), to assess your risk tolerance level.

The answers to the questionnaire drives the type of investment portfolios that the robo-advisor recommends. Then the algorithm maps out a sensible asset mix of low fee exchange traded funds (aka ETF’s) that reflects your age, goals, and risk comfort level.

The majority of robo-advisors use Modern Portfolio Theory to create their analysis and portfolio options. Once options are established, robo-advisors continue to monitor these portfolios to ensure that the optimal asset allocations are maintained and rebalanced even after markets fluctuate.

What do these asset allocations look like?

Every asset class is given a target weight and corresponding tolerance range. For example, an asset allocation strategy might include a requirement to hold 40% in U.S.-based equities, 30% in emerging market equities, and 30% in government bonds with a range of +/- 5% for each asset class.

Tips for choosing robo-advisor

Using rebalancing methods means that U.S.-based markets can fluctuate between 35 – 45% while 25-35% of the portfolio should be allocated to government bonds and emerging market equities respectively. When the weight of a holding jumps outside of the allowable range, the entire portfolio is rebalanced to reflect the initial target allocation.

Another type of rebalancing some robo-advisors use is tax-loss harvesting. Tax-loss harvesting is a strategy that involves selling securities at a loss to offset a capital gains tax liability in a similar security.

Robo-advisors can do this by maintaining two or more stable ETF’s for each asset class. For example, if the Russell 2000 ETF loses value, it will automatically sell it to lock a capital loss while simultaneously buying a different Russell 2000 ETF.

Who Uses Robo-Advisors and Why?

Due to low maintenance costs and fees, low minimum starting investment required, and always-on convenience, robo-advisors have proven to be highly attractive to do-it-yourself investors.

Also, robo-advisors are not only popular with do-it-yourself investors, but also has proven to be especially attractive to new investors with modest assets to invest. These people typically cannot afford a full-fledged financial advisor or simply do not want to pay the high cost for their investment advice.

The best robo-advisors offer low fees, easy account setup, robust goal planning, portfolio management, and attentive customer service.

These robo-advisors should also have security features to protect you from hacking, educational tools to enable you to become a better investor, and automated way to easily optimize financial strategies.

Today, there are more robo-advisors than ever before and growing. With so many companies to choose from, it can be difficult to find the one that is right for you.

Here are 5 few things to consider when choosing a robo-advisor.

Know Your Goals

Before researching any robo-advisor, investors should think about their goals and what they want to accomplish. Some people may only need help selecting portfolio investments and asset allocation while others may need a more holistic approach since they have multiple goals to consider. They may need to take not only retirement but also college planning, and a post-retirement “2nd act” into account.

Once an investor knows what they want, next they need to decide if it’s enough to own a pre-determined asset model that automatically rebalances retirement funds or if they need help to save for all their goals at the same time.

Lastly, knowing your goals will also help with understanding what tools and services a robo-advisor can provide for investors to learn about risk tolerance, time horizon, portfolio customization, and what is needed to reach their goals.

Ease Of Use

If a new investor, ease of use and design appeal could be crucial factors in determining if a robo-advisor is right for you.

Here are a few questions to ask yourself when determining if the site is easy to use.

  • Does it have an appealing design?
  • Is the site intuitive?
  • What types of features does it offer?
  • How easy is it to find what I’m looking for?
  • How reliable is the customer service?
  • Can I talk to a human advisor or customer service rep if needed?

The whole premise of the site should be an encouraging layout that promotes you investing with them. If the site is cumbersome or has a frustrating consumer experience, this is the complete opposite of what you are looking for.

Make sure they have what you need and that it is easy to use before committing to working with them.

Review Features, Offerings, And Services

For features to check out, investigate what type of tools, calculators, and educational information is readily available.

Also look for what types of financial services are being offered such as banking or savings capabilities. Most robo-advisors also offer a variety of account types from IRA’s and taxable accounts to 401K’s and tax optimization strategies.

How to choose the right robo-advisor

More sophisticated robo-advisors (i.e., think M1 Finance, Schwab, Betterment, Wealthfront), use the financial information and data they collected from you to analyze your odds of success for a given portfolio and time horizon.

These robo-advisors use a Monte Carlo analysis for determining success. For those not familiar, a Monte Carlo analysis is a statistical model that simulates thousands of different potential outcomes to estimate the probability of success or failure for a given plan.

As a rule of thumb, robo-advisors like to steer younger clients towards portfolios heavy on stocks since they have a longer time horizon to retirement. Robo-advisors like to steer individuals with shorter time horizons to retirement towards portfolios heavy on bonds and less volatile assets.

Robo-advisors also have features that can allow you to track progress towards your goals over time and change assumptions if your financial situation changes.

Make sure the robo-advisor you choose to work with has the features you need not only now but in the future as well.

Assess Fees and Minimum Investment Requirements

Robo-advisor costs and minimum investment requirements vary by both platform and service.

Some robo-advisors do not require a minimum amount to open an account (i.e., M1 Finance, Betterment, and Personal Capital) while others require up to a $5,000 minimum deposit to open an account (i.e., Vanguard or Schwab).

Another thing to keep an eye out for are fees. Fees are 1 of the 3 killers of any retirement portfolio and the more you minimize it, the more money you will keep.

Most robo-advisors charge very low annual fees, some as low as 0.05% (Thank you Vanguard!), with most starting under 0.25%.

These fees are on top of the fees the index funds / ETF’s charge you.

However, there are others that charge a much higher annual fee of almost 0.9% (i.e., Personal Capital)

You’ll probably find the ones that offer a hybrid robo / human service will charge higher fees since they must pay for those people you talk to.

While this is still much lower that than 1-2.5% you’ll find most human brokerage firms charge, it is something to keep in mind.

A good rule of thumb for investors is that if you don’t anticipate needing much human support look for the robo-advisor with the lowest management fee.

Investors who expect to need a moderate to high-level of human interaction (i.e., live chats, phone interactions, etc.) should therefore expect to pay higher fees.

Whatever is decided, make sure you take the fees and minimum investment requirements into account so you purchase the right robo-advisor that meets your needs.

Research Support Staff Credentials

Just because a robo-advisor offer human support services, doesn’t mean they can help you.

For example, my company’s retirement services are managed by a financial advisory company (I won’t name the company). The analytical tools are good and are free for me to use. If I want to, I can pay a 1% management fee for a “live person” to help me manage my retirement portfolio.

They offered the 1st 3 months free as a test run so I tried it. The human rep only regurgitated the exact same information that my analytical tools produced…. almost word for word.

When I approached them why this was so similar, they told me it was because they read off a script using the same tools I use.

In other words, they had no financial expertise, added no extra insight, and wanted to charge me a 1% asset under management fee! I dropped that service faster than you could say, “I’m out of here!”

The reason I share this story is that if an investor wants to speak to an advisor, you need to dig deeper and understand them better. Inquire about their experience, their education, and the amount of assets they managed both in the past and today.

You need to understand if they are licensed and experienced. In my above example, when I complained to the management of that investment services company, they hooked me up with a “senior financial advisor”. I will say that person knew their stuff! I was actually impressed with his expertise and wanted to work with him directly… they refused so I dropped the service.

If you find that your rep is having the same issues I described above, don’t be afraid to drop them too.

Final Thoughts

Robo-advisors are a great option for entry-level investors because of their low fees, low-cost threshold, and overall ease of use.

If you are just starting out or have little to invest, robo-advisors may be a great option to get you on the right financial track.

Tips for choosing robo-advisor


As you become more acquainted with investing and build your knowledge base, I recommend taking over the advising role yourself. IMO and from my experience, you can do just as good of a job as most financial advisors and keep those expensive management fees in your pocket not theirs.

But how do I learn more investing money wisely?

Stay tuned…. I’ll be writing several articles about this soon. You won’t want to miss it!

Live The Life You Love, Want, And Deserve! 😊



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