Robo-advisors have grown faster than many expected. Today, the robo-advisor market includes accounts with more than $1 trillion in assets under management, according to estimates. Some robo-advisors offer low fees, while others charge high management fees and have high account minimums. Some also use hefty cash allocations that generate revenue and suppress long-term investment returns.
High-Yield Cash Accounts
There are two main types of savings accounts: traditional ones that pay a modest amount of interest, and high-yield savings accounts that offer far more. The latter are often offered by online banks, though they can also be found at brick-and-mortar institutions.
A top-tier savings account can help you earn a competitive APY on your money while also protecting it from the volatility of stock markets. But finding the best one for you requires a bit of research. Some of the most popular options include:
First, you should consider whether the savings account offers a minimum initial deposit or ongoing balance requirement. These can range from $0 to over $100, and falling below the required minimum could result in being hit with a fee or losing the ability to earn a higher interest rate.
Then, you should look at the bank’s fees, which can add up over time. Some of the most attractive accounts don’t charge any maintenance or transaction fees, while others do. Finally, you should also check the account’s interest rates, which can change from time to time.
The best high-yield savings accounts will have the highest APYs and won’t impose any fees or minimum deposit requirements. They’re also FDIC- or NCUA-insured, so your funds are safe. However, you should be sure that you don’t rely too much on these accounts to reach your short-term goals.
Mutual Funds
The robo-advisor industry is much smaller than it was once predicted and a lot harder to make profitable for all but the lowest-cost providers. In September 2022, Swiss banking giant UBS canceled its eight-month-old agreement to buy Palo Alto robo-advisor Wealthfront for a rich $1.4 billion, citing difficulties making the deal sustainable.
Robo-advisors help you invest a small amount of money over time in a portfolio that suits your goals and risk tolerance. Robo-advisors typically use ETFs and index funds, but they also can use other types of securities like stocks or bonds.
A robo-advisor can offer advantages like automated investment management, fee transparency, and lower minimums than traditional brokerage firms. They can also offer a range of account types, access to financial planners, and integrated banking services.
However, robo-advisors don’t always have your best interests in mind. For instance, a commission-based advisor who earns commissions on each purchase may push you towards expensive funds and investments that generate high AUM management fees.
In contrast, a full-time financial advisor at Ameriprise can consider your unique financial picture and recommend an investment strategy that is more aligned with your long-term goals. A financial advisor can also offer advanced features like tax-loss harvesting and direct indexing (instead of owning exchange-traded funds that track market indices, you own the actual securities in the fund). They’re also not bound to a rigid framework like Modern Portfolio Theory that drives robo-advisors, which is why a hybrid robo-advisor may be a better choice for some investors.
ETFs
Exchange-traded funds (ETFs) trade like stocks but differ from mutual funds in that they can be diversified in a broad range of asset classes and market sectors. They can also be narrowly focused, such as a single large- or small-cap stock, a country, a sector of the economy, a commodity, or an industry.
ETFs offer investors instant diversification and low fees. In addition, they are often more transparent than their mutual fund counterparts. The average ETF has 22 registered APs that can create and redeem shares of the fund and four APs that are actively engaged in these activities at any given time.
Robo-advisors can help you clarify your investment goals, time horizon, and risk tolerance and recommend portfolios tailored to your needs. Some robo-advisors also have tools that allow you to run scenarios on your goal planning and sync outside accounts for a comprehensive financial picture. The best robo-advisors can help you plan for retirement, buying a home, and even paying for college for yourself or your child.
Betterment is a leading standalone robo-advisor for beginners, offering a straightforward questionnaire and a robust selection of portfolios. Its rebalancing and tax-loss harvesting ensure optimal after-tax returns. In 2022, Betterment acquired Makara to give its customers access to a range of managed crypto portfolios including Bitcoin/Ethereum, a broadly diversified cryptocurrency universe, and a sustainable crypto option.
Stocks
Choosing the right robo-advisor for your investing needs can be tricky. Investors should first understand what they want to accomplish with their investments. This could involve creating college funds for children or saving for a new car or home. This information will help the robo-advisor determine an appropriate portfolio risk level and allocation strategy. Investors should also consider how much they are willing to invest with each robo-advisor. Some require a minimum investment while others do not. Finally, investors should look at additional features such as customer service access, fees, and cash management services.
Robo-advisors differ in their offerings, but all robo-advisors are focused on offering clients a low-cost alternative to traditional financial advisors. Some robo-advisors are designed for specific types of investors, such as millennials or baby boomers. Others are focused on offering a complete financial planning solution for a fraction of the cost of a human advisor.
The robo-advisor industry is growing, and it is becoming more competitive. As a result, more established players are entering the space with competing solutions. However, the robo-advisor business is likely to face significant challenges in the near future. Rising client acquisition costs and declining average account sizes are making it harder for robo-advisors to turn a profit. In fact, some are approaching an unsustainable crossroad where the average lifetime revenue from a client is less than the cost of acquiring them.
