Battle of the Robots: Which Robo-Advisor Is Right for You?

For decades, investors have trusted their money with real, human financial advisors. But as technology advances, robots are beginning to take over the financial industry.

Robo-advisors are portfolio management systems that use complex algorithms to mimic a financial advisor's investment decisions. In other words, the technology is constantly analyzing the market and making investments in accordance with your goals, your risk tolerance, and more.

Automated investing platforms are growing in popularity, with more people favoring the lower fees and limited human interaction that robo-advisors offer. Betterment, one of the leaders in the robo-advisor industry, currently has about $8.5 billion in assets under management, and its competitor, Wealthfront, has over $6 billion under management.

While each robo-advisor offers its own unique advantages (along with a few drawbacks), the right one for you will depend on what you're looking for in an automated advisor.

Fully automated robo-advisors

A true robo-advisor is completely automated and requires little to no human interaction on the part of the client. When you sign up, you'll typically provide some information like your age, the number of years you have left until you plan to retire, your comfort with risk, your level of investing experience, and so on. From there, the platform will automatically invest your funds where it sees fit and then make adjustments as needed.

Wealthfront and Betterment are the leaders in the robo-advisor industry, each with billions of dollars under management. While they have similar features, there are a few key differences as well:

There are two key differences between Wealthfront and Betterment: Betterment offers two types of plans rather than one, and it also offers access to financial experts. (Only the premium plan, though, offers access to Certified Financial Planners to discuss how life events can affect your investment strategy. The basic plan just offers access to experts for general financial questions.)

The two plans have similar fees as well, and both charge much less than the average financial advisor (who typically charges around 1% of assets).

Who they're the best fit for

Fully automated advisors are great for people who are just starting out in investing or who are comfortable handing the reins over to technology.

Because traditional financial advisors' fees can be tricky to understand (there are advisors who only make money from fees, others who earn commission, and some who have a mix of both), the simple fee structure of robo-advisors makes them appealing to young investors, or even experienced investors who are tired of paying high fees.

Letting technology take over can also help to prevent human error. Even the most professional and experienced advisors can let their emotions get the best of them, leading them to buy or sell at inopportune times. But algorithms don't have emotions, which is an advantage for people who prefer to keep emotions and finances as separate as possible.

The biggest downside to fully automated advisors is the lack of a human touch. While Betterment does give its users the opportunity to talk to financial experts, unless you have the premium plan, you can't discuss major life events or other changes that may affect your investments. For example, if you're planning to start a family in the next few years or you want to buy a home, it's difficult to determine how these changes will affect your strategy without talking to a real, live professional.

Hybrid robo-advisors

Another type of robo-advisor gaining popularity is the hybrid. This type tries to solve some of the problems of fully automated platforms by adding a human touch while still keeping the robo features that clients love, such as lower fees and scientific algorithms.

The hybrid industry is expected to grow at a faster pace than fully automated robo-advisors. By 2025, hybrid advisors are expected to manage about 10% of all investable assets worldwide, or about $16.3 trillion, according to a recent report. Fully automated robo-advisors, on the other hand, are expected to manage just 1.6% of all investable assets worldwide by 2025.

Typically, hybrid advisors charge slightly higher fees than robo-advisors, because you're getting advice from people, and people, unlike algorithms, need to be paid. Many of the hybrid advisors on the market today are offered by major players in the brokerage industry, including Charles Schwab, Vanguard, and Personal Capital. Charles Schwab's hybrid advisor, Schwab Intelligent Advisory, has a fee of 0.28%, with a maximum fee of $900 per quarter. Vanguard Personal Advisor Services has a slightly higher annual fee of 0.30%, but it prides itself on the amount of personalized advice each investor receives.

Who they're the best fit for

Hybrid advisors are great for someone who likes the automated aspect of robo-advisors but also wants access to humans who can talk about their goals, their changing circumstances, and their investment strategy. While the fees typically aren't as low as those of a true robo-advisor, they come close while still offering human support for when you need to talk through a major life change or discuss your investment strategy.

The biggest downside to hybrid advisors is that many of them have high minimum account balance requirements. Schwab Intelligent Advisory requires at least $25,000, and Vanguard Personal Advisor Services requires $50,000, for example. So these types of advisors may be out of reach for someone who is just starting out or doesn't have much money to invest yet.

As technology continues to advance, the robo-advisor industry will only continue to grow in popularity. But not all robo-advisors are created equal, so be sure to weigh your options and consider what you're looking for in an advisor before deciding which one is right for you.

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