New technology is springing up around us all the time. Drones, self driving cars, virtual reality video games; new technologies have changed every aspect of our lives, including the way we handle our money. The most recent game changer in the finance world started in 2005 when the first robo-advisor algorithm was created. It took several years for the technology to be adopted but when it did it exploded. Bloomberg news reports,
“The automated investment platforms industry has seen dramatic growth, from almost zero in 2012 to a projected $300 billion in assets under management at the end of next year (2017). This year alone, Betterment almost tripled its assets to $3 billion. Robo-advisers could manage $2.2 trillion by 2020.”
Robo-advisors are here to stay, but why have they become so popular and how do you know which platform is right for you? We have compiled all the information that you need to know to make an informed decision.
The Game Changing Financial Tool
To summarize Investopedia, a robo-advisor is a wealth management tool that invests and diversifies your money without the use of a human advisor. The platforms use algorithms to appropriately invest money for you in a way that best fits your age, years to retirement, and risk tolerance. There are several advantages and disadvantages to adopting this new technology.
- Very low fees
- Easy to use for beginners
- Automatic rebalancing
- Good for people with small amounts of money
- Limited investment options
- Financial plans are not personalized
- Robo-advisors can not help with real estate, insurance, or other financial decisions
The Top Robo-advisors
Now that you know what you are getting yourself into, which robo-advisor is best for you?
#1 Wealthfont was launched in 2011 and has quickly grown to just under $3 billion in assets. They have been very attractive for beginner investors because they do not charge fees for the first $10,000. They have also turned their marketing to larger investors with over $100,000 with their new tax software that the company says can add as much as 2% to annual investment performance.
#2 Betterment has dedicated its business model solely to robo-advising which has earned it the number 2 spot among its competitors. They are currently the largest robo-advisor with assets just over $3.9 billion. Their fees are relatively low starting at 0.35% and get lower the more you invest with them, bottoming out at 0.15% after $100,000 invested. What has made Betterment so popular is they have a minimum account balance of $0 allowing anyone to become an investor.
#3 Charles Schwab is well known in the investment world for being innovative and having very low cost products. It finally launched its own robo-advisor platform in 2015 and offers the service for free. The low cost and recognizable name has made Charles Schwab among the top robo-advisors out there. Where they fall short is the minimum balance of $5,000. This has made it difficult for some beginner investors to get started with Charles Schwab.
Competition in the robo-advisor space is very high right now which has been driving down the prices for the benefit of its customers. As this space grows things are bound to change and hopefully for the better.
Do you think that robo-advisors are right for you?