Beginner investors considering using a robo-advisor have no shortage of options, with digital upstarts like Wealthfront and Ellevest competing with the old guard of Vanguard and Fidelity to invest your money. But the best option for newbies is Betterment, a new report finds.
Backend Benchmarking's recent Robo Report monitors robo-advisors on an ongoing basis on more than 45 different metrics, including account minimums, overall costs, ﬁnancial planning options, customer experience, transparency and more.
Robo-advisors are generally marketed to beginners because they take much of the legwork out of picking actual funds to invest in. You simply answer a few questions about your goals and risk tolerance, and an algorithm determines how to best invest your money.
While Fidelity Go and Vanguard are the firm's top picks overall, Betterment is the Robo Report's choice for entry-level investors for a number of reasons:
Another perk: Betterment's goal forecaster tool allows investors to "see how one-time or recurring investments would impact the probability of achieving a goal." That's useful for people who aren't familiar with how investing works over the long term.
Betterment's $0 minimum is clearly a differentiator, especially when a top overall pick like Vanguard Personal Advisor Services has an account minimum of $50,000 (Fidelity Go has a $0 minimum for digital only planning, and a $25,000 minimum for advice and planning). If you're new to investing, you might not have a lot of money to spare. But time in the market is a key factor in building wealth, because the earlier you get started, the more time your investment earnings have to compound.
One important note: Betterment's management fee is in addition to any fees charged by the funds you invest in. The funds themselves can have expense ratios ranging from zero to 1% or more. You want to keep these fees as low as possible. The management fee shouldn't necessarily be a deal breaker, but it's an important consideration, as you wouldn't incur this fee if you built a portfolio yourself.
Typically, robos charge less than human advisors, because a robot doesn't earn a salary or need health insurance. How much a financial planner charges depends on the planner and how much money they are managing for you, but you can expect to pay around 1% of assets under management, much more than the 0.25% to 0.89% charged by the robos Backend Benchmarking's report tracked.
SoFi is the runner-up for beginners. Its top selling points include no minimum balance requirements and no management fees.
While the term "robo-advisor" might conjure images of a shadowy algorithm trading stocks to beat the market, they're much less risky than that. Typically, robos offer accounts largely composed of low-cost index mutual and exchange-traded funds (ETFs). And many offer access to live financial advisors when you need it, for free (Vanguard) or for a fee (Betterment).
For those who want to invest, but don't have time to research every mutual fund on the market, they can be valuable tools. But a robo isn't always necessary. You can invest in mutual funds and ETFs on your own without the additional management fee.
If you're offered a 401(k) at work with an employer match, it's smarter to start there than through a robo. Otherwise, you're giving up a potentially significant amount of "free" money from your employer (the average employer match was 4.7% in 2019).
While simplicity and ease are robo-advisors' top-selling points, they're not right for every strategy. Yes, beginners should invest in low-cost, broad-market index funds. But as you get older, and your investment strategy becomes more sophisticated, you might want more options and flexibility than a robo can deliver.
Still, if you've been hesitant to invest because you don't know how to get started, robos can offer clarity, as well as the push you need to actually get in the market. And that's priceless.
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