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How to Pick a Robo-Advisor [3 Factors to Watch]

Three questions to ask when comparing robo-advisor platforms.

There are more than 200 robo-advisor websites out there. How do you pick an investing site right for your goals and needs? You’re deciding a company that will guide your retirement savings to your goals. This isn’t something you can leave to chance or make a snap decision.

In this video, I’ll reveal three questions to ask when comparing robo-advisors and why every investor should consider this new type of investing.

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What Do Robo-Advisors Do?

We talked last week about the revolution in investing with robo-advisors and why I think every investor should consider putting part of their portfolio in the new type of investing.

Today as part of our partnership with Emperor Investments, I want to talk about how to pick a robo-advisor. There are dozens of good sites out there, so how do you find the features that are going to work best for you?

In our last video on how robo-advisors work, we saw that these software based programs take all that information like your goals, your tolerance for risk and income and then design a portfolio of funds to help meet those long-term goals.

how robo advisors work

Most robo-advisors invest your money in a collection of funds to give you a diversified mix of stocks and bonds. They automatically invest across the funds and rebalance regularly to make sure you stay on track with the right level of risk and return.

Compared to that DIY investing strategy, always picking stocks and having to manage your portfolio, it’s a completely stress-free way of investing and part of the reason I think everyone should consider putting part of their money in a robo.

You’ll get around market returns, more or less, for that part of your wealth, you won’t have to worry about making those bad investing decisions like panic selling, and it just gives you that confidence to know that at least part of your wealth is working to your goals.

How to Pick the Best Robo-Advisor

But a search for robo-advisors shows more than 200 companies available to just U.S. investors and thousands worldwide. How do you know which are not only legit but also have the features right for your needs?

For robo-advisors, there are a few things you can look for to compare and make sure you find the right one. Make sure to find any fees charged on the platform, any performance data you can find on portfolios and additional features.

Fees on robo-advisors come in two flavors and this is one of the biggest things that catches investors off-guard. Platforms usually disclose their management fees pretty clearly. This is the percentage charged on your total portfolio each year to the platform. It’s usually between 0.25% to half a percent.

Now even that half a percent isn’t too bad considering robo-advisors don’t charge you a fee for each time you invest your money. The platforms automatically invest and rebalance your portfolio with no fees or commissions.

The big surprise though, and this is something that isn’t usually disclosed very well on platforms, is the fee charged by the ETF managers. This is the annual expense ratio you pay for holding those funds and averages around 0.44% a year.

Adding up that management fee and the fund fees means you can be up to as much as a percent a year for total investing expenses on your account. That’s basically about what a personal financial advisor is going to charge so you’re not saving much going with a robo-advisor in some cases.

The moral here is just to look for the fee charged by that robo-advisor and understand you’re paying a fee on the funds as well. If the platform doesn’t disclose the average expense ratio for the funds, find out which funds they use and you can find the expense ratio on their websites directly.

Learn more about how Emperor Investments is changing the way robo-advisors work

The second thing to look for comparing robo-advisors is average performance data.

Now this one can be tough to come by because there’s no real requirement to disclose returns. Most robo-advisors invest broadly in those funds with hundreds of stocks in each so returns are going to be close to that market return, the portfolio just tends to mimic the broad market.

But there are a few platforms out there that disclose returns and do a better job at performance. This is actually one of the biggest reasons I like Emperor Investments because of that pure equity investing strategy.

Instead of investing your portfolio in funds, the platform combines its robo program with stock analysis to invest in individual stocks. So what you get here is a portfolio with upside potential versus just a group of funds that tracks the market.

Finally here comparing robo-advisors is any special features included in the program.

One feature robos have been using to differentiate themselves is that investing strategy. For example instead of just investing across a group of funds, investing in individual stocks like on Emperor.

This is probably one of the biggest factors to compare across platforms because the vast majority just use that broad ETF investing strategy. Frankly, if you’re going to just invest in a group of funds, you could do that yourself and save the half percent annual expense.

Within that investment strategy idea, you can look to which funds or types of stocks the platform invests. Are the funds used primarily market funds or in specific sectors? What kind of bond funds are used? For example, Emperor Investments uses a dividend focus for its stocks so even if the market tumbles then you can still get that positive return on dividends.

Another feature you might look for is the ability to invest your portfolio across different financial goals. Most robo-advisors invest for just one goal, exclusively to your retirement needs. This is a problem because if you’re also investing for other goals like education costs then you’re not going to want your portfolio in the same funds or stocks as if you were only investing for retirement.

Getting Started on a Robo-Advisor Platform

Once you’ve found a robo-advisor that meets your needs, getting started is actually really easy. You’ll spend less than 5 minutes to answer some basic investing questions to give the platform an idea of your goals and tolerance for risk. Then setting up an account might take another five minutes to fill out contact information and connect your bank account for deposits.

Other than making deposits into your account, you won’t have to do anything else. The platform will automatically invest your money each month across your portfolio.

I’m going to be doing a complete review of Emperor Investments next week, how to get started and why I like the robo-advisor. You can click through this link to see how Emperor Investments is different from other websites.

how to pick a robo advisor website

Full transparency here, I have an affiliate partnership with Emperor and receive a commission on signups. I never review or partner with a company that I don’t fully recommend, so that hasn’t influenced the information here. I just want to be upfront if you decide Emperor Investments is right for your needs.

Important Disclosures:

1) Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

2) Rebalancing/Reallocating can entail tax consequences that should be considered when determining a rebalancing/reallocation strategy

3) Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

4) Average ETF Fees:  http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/

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