If you’re trying to choose a robo-advisor to invest your hard-earned money, your first instinct might be to compare investment returns. After all, you want your money to be safe — and grow.
The problem is, there’s no guarantee a robo-advisor with stellar returns last year is going to outperform this year.
And while it’s wise to verify that a robo-advisor’s performance isn’t way out of step with its competitors, that’s only part of the picture.
Consider these seven elements when choosing the best robo-advisor for you:
1. Account minimum
First, narrow the list to robo-advisors whose minimum account requirement works with the amount you want to invest.
For example, our list of “best robo-advisors” includes Charles Schwab Intelligent Advisory and Vanguard Personal Advisor Services. Both offer valuable services, but Schwab requires a $25,000 minimum investment and Vanguard requires $50,000.
At the other end of the spectrum — also on our “best robos” list — Betterment, Ellevest and Wealthsimple have $0 account minimums, and Wealthfront’s is just $500. Check out our full list of best robo-advisors for more details.
2. Availability of human advisors
Robo-advisors vary in how much access, if any, you get to a human advisor. For example, both Betterment and Ellevest offer premium accounts with unlimited phone access to advisors.
Meanwhile, Acorns and Wealthfront don’t offer live advisors but have online tools to help you set financial goals.
Consider how important it is to you to have a human available to field your questions. For more on robos’ advice services, check out this story.
3. Investment lineup
One plus to using a robo is you don’t have to think too deeply about investment choices. But do pay some attention.
“You want to know where your money is being invested,” says David Goldstone, research analyst at BackEnd Benchmarking, which publishes the Robo Report, a study comparing robo-advisors’ investment performance.
You may need to fill out a questionnaire to get a picture of where your money will be invested. “A majority of them want some information about you before they give you a look under the hood,” Goldstone says.
Make sure the recommended portfolio makes sense for your individual circumstances.
For example, Schwab’s Intelligent Portfolios service keeps a relatively high percentage of investors’ money in cash — a minimum of 6%. That may not be ideal for, say, a young investor eager to harness the market’s long-term gains. Read our review of Schwab Intelligent Portfolios.
Look for a decent fit, but don’t obsess. Getting started — even if your portfolio isn’t perfect — is what counts, because investments need time to grow and compound.
For long-term goals, “Investing is better than leaving your money in cash,” says Barbara Roper, director of investor protection at the Consumer Federation of America, a nonprofit advocacy organization. “You do not have to get everything exactly right to be better off than you would be sitting on the sidelines, particularly if you’re keeping your costs to a minimum.”
Once you’ve narrowed your list, compare fees. That includes management fees — which tend to range from 0.25% to about 0.9% — and investment fees.
Even seemingly small fees can have an outsize impact on long-term financial health. Check out our article on how a 1% fee can cost you $590,000.
We detail average investment fees in our robo-advisor reviews. For example, here’s our review of Wealthfront, where average investment fees — called expense ratios — are between 0.08% and 0.11%, and our review of Betterment, where expense ratios average 0.13%.
5. Portfolio rebalancing
The main reason for using an investment advisor is getting help managing your portfolio, so it makes sense to find one that offers rebalancing to keep your asset mix correct over time.
“It’s one of the benefits of the automated platform,” Roper says. “If the stock market booms or crashes, you don’t have to figure out how to adjust it. It does that adjustment for you.”
You may also want to look for additional services, such as tax-loss harvesting.
6. Account types
These days, most major robos offer taxable and retirement accounts, but maybe you’re looking for a 529 plan for your kid’s college savings. Make sure your robo-advisor offers the types of accounts you need.
7. Investment performance
If a robo’s returns differ substantially from the competition, take note.
It’s best to look at long-term returns — five years or longer — because short-term returns don’t give you a complete picture. There’s just one problem: Most robos haven’t been around that long.
“Performance measures [of] less than five years are meaningless,” Roper says. “You get a view into how something does in one type of market.”
Still, she adds, “If you have a firm that’s significantly underperforming or that seems all over the board, that would be a concern.”
BackEnd Benchmarking’s Robo Report, available for free on its website, has data going back two years for seven companies and just one year for nine companies. (BackEnd is owned by the people who run Condor Capital Management, a fee-only investment advisory.)
For those companies, here’s the one-year and two-year trailing annualized performance, after fees. These results are based on a 60% equities / 40% fixed-income portfolio in a taxable account, using data through the first quarter of 2018.