How to know if a financial robo-advisor is right for you

By Jeanne Sahadi, CNN

(CNN) — No matter how much money you have, every adult faces countless financial decisions every year — how to stay afloat, prosper, prepare for the future, enjoy life and minimize hardship.

It’s … a lot.

So if you’re looking for help along the way, there are plenty of increasingly low-cost digital and human adviser options.

In the rapidly growing robo-advisory industry, many firms no longer just offer to automate the investment and rebalancing of your money in a pre-selected portfolio of funds. Now they offer a much wider array of services and financial planning tools.

Many also offer hybrid solutions: automated portfolio management plus access to human advisers who can help with your more holistic financial planning needs.

To figure out if a robo-advisor might be a good fit for you, here are some things to consider:

Preference: Digital first or human first?

If you’re a digital native or are just very comfortable banking and investing online, you’re likely to feel more comfortable with a robo-advisory service than someone who prefers direct interaction with an actual person when seeking tailored, expert guidance.

What will an experienced human adviser provide that an automated portfolio management system won’t?

“Perspective, judgment and coaching — talking through something and addressing fears and concerns, such as managing (a client’s) reaction to short-term (market) volatility,” said Paul Brahim, president-elect of the Financial Planning Association and managing director of the Wealth Enhancement Group.

Costs

It’s usually much more expensive to work one-on-one with a certified financial planner. You might pay a couple of thousand dollars to have that person create a comprehensive financial plan for you, then either an annual fee or an annual percentage of assets that they manage for you.

But, today, the barrier to entry is coming down with many fee-only planners. “Pricing is pretty diverse. I’ve seen a lot of growth in the area of subscription-based models,” Brahim said.

So you might pay a manageable monthly or quarterly subscription fee, or some planners may charge an hourly fee if you just want to address a single issue on a one-time or occasional basis.

But robo-advisors are typically much more accessible. For instance, Vanguard just lowered the amount you need to invest to use its Digital Advisor service to $100 from $3,000. Your annual fee for the service is estimated to be $15 for every $10,000 invested in an all-index-fund portfolio. You’d pay between $11 and $20 a year if you have some active funds in the mix.

“These fees are in addition to the expense ratios of the underlying funds. In Vanguard’s case, our all-index portfolios have an average expense ratio of 0.05%, or $5 for every $10,000 invested,” said Brian Concannon, the head of Vanguard Digital Advisor.

If you invest $50,000 or more, you can use its more premium hybrid service — Personal Advisor — which gives you access to human advisers. And the annual fees are still very low.

Your needs and goals

What are your specific financial goals? How comfortable are you with risk? What are your biggest concerns or fears?

You will be asked some version of questions like these when deciding whether to sign up for a given service.

So, getting clarity on what you want out of the experience will help you figure out if a robo firm offers you the kind of assistance (including human access) that you want.

Typically, for people looking to sign up, “the single-biggest trigger is a major life event,” Concannon said. Think having kids or buying a house or planning to retire in a few years. Or it could be getting your first job and steady paycheck. The next big trigger: A desire to reduce financial stress.

Room to grow

If you want to use a robo-advisor because you’re just starting out and don’t have a lot of money, chances are that several brand-name firms can simply and inexpensively get you started by recommending an asset allocation that makes sense given your goals and then automatically manages that portfolio for you.

But as you build up assets and your life (and tax situation) get more complex, you will need more than that.

So consider when shopping for a robo-advisor, “Is there room for you to grow on the platform with respect to different levels of service?” said Ben Johnson, Morningstar’s head of client solutions in asset management.

Tax and estate planning issues in particular might become a concern, for instance.

“Consider business owners in their 40s or 50s whose assets are concentrated in their businesses: It’s illiquid but ostensibly worth a whole bunch. They have tax and estate planning issues, cash flow and debt management issues,” Brahim said.

Or in one situation, he worked to help the son of a client who had decided to consolidate several of his robo accounts, one of which had an IRA in it. The investor was unaware of the tax consequences of moving money out of his IRA into his personal accounts. “So he was staring down the barrel of a $38,000 tax bill because of early withdrawal penalties and taxes,” Brahim said.

An automated portfolio management program might have indicated that cashing out an IRA would incur taxes and penalties if it’s not properly rolled over to another tax-deferred retirement account. But a planner, who would offer the same advice, might have been more persuasive in advising the client to avoid that mistake and then offer guidance on how to achieve his same aims without incurring penalties.

Identifying the best from the rest

You want to use a service that is run by a company that is well financed, has a good reputation and offers a diversified range of investment options, rather than one that hypes the latest “shiny object” in investing, Johnson suggested.

Since the robo-advisory space has been expanding rapidly, periodically check some of the “best of” lists compiled by places like Morningstar. Its top overall picks for 2023 were Vanguard, Fidelity Go, Schwab Intelligent Portfolios, Betterment and Wealthfront. They were assessed on price, portfolio quality, their parent company and their breadth of services.

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