Is Robo-Advisor Performance the Best Way to Pick a Digital Investment Firm?

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If you want to make your savings work for you, investing is a smart path. But how to go about doing so? From DIY to hiring a financial professional, the investment management options abound.

The last 10 years have given us the robo advisor, a digital investment manager that uses computerized algorithms to create smart investment portfolios for low fees.

These fabulous investment platforms include a buffet of investing varieties, so choosing a robo advisor to fit your needs requires a bit of sleuthing. Throwing darts at a list is one way to choose a robo advisor. Another is picking the best performer.

You might wonder: Is choosing the one with the best performance the way to go?

Let's not be too hasty. Here's what to consider first.

Robo-Advisory Performance Over the Past Few Years

First, consider the source of a robo advisor’s performance.

It’s likely that a digital investment advisor’s returns will mirror those of their underlying indices. In plain English, that means that if you have 70% invested in an S&P 500 index fund in your robo advisor and 30% invested in a bond exchange-traded fund (ETF), you’ll earn proportionately what the underlying indices return, less fees.
If the S&P 500 index fund earns 9% one year and the bond fund earns 2.5%, your personal return will approximate 7.05%. Don’t think that those returns are sub-par — studies show that matching the profits of index funds beats the gains of most actively managed funds!

With most robo advisors, your return will be similar to that of the index fund mix and returns proportionate to the amount invested. And robo advisors tend to tweak the investment mix or asset allocation on occasion.

For example, you’ll find small differences among the annual returns of many robos, with Schwab, SigFig, Wealthfront and WiseBanyan all earning two-year annualized returns above 9% with a balanced 60% stock, 40% bond portfolio. Yet one-year annualized returns for those same digital investment advisors had greater divergence.

Additionally, winning the robo-advisory performance race one year doesn’t guarantee a medal the next.

Ultimately, choosing a robo advisor based on returns is ill-advised. Robo-advisory winners will change from year to year.

Robo Advisors Aren’t All Alike

So robo advisors are a sound way to invest, but choosing one is easier said than done. There are countless varieties and ways that robo advisors invest your money.

Although many invest your money in index exchange-traded funds, not all do. Some robo advisors, such as Emperor Investments and Personal Capital, invest in individual stocks. Others employ tax-loss harvesting techniques that might boost annual returns as well.

Qplum is an actively traded robo advisor that uses artificial intelligence (AI) and hedge fund-like strategies to invest, whereas Twine, Acorns and WiseBanyan are simplified robo-apps with more basic investment strategies.

But wait — don’t roll your eyes in confusion. As with any big job, it’s easiest to choose a robo advisor by breaking up the task into a few manageable steps.

What’s the Best Way to Choose a Robo Advisor?

If past returns aren’t the best way to pick a digital investment firm, what is?

A better way to choose a digital investment advisor is to start with your needs and then match up your preferences with the best robo advisor for you.

For example, you might want a plain-vanilla robo advisor with low fees that will invest your money in a diversified mix of stock and bond funds, in line with your risk level. For example, Schwab Intelligent Portfolios is a basic robo advisor with zero management fees.

Or if you’re low on cash, you might search for a robo advisor that doesn’t require a lot to get started. Invest with WiseBanyan and you need only $1 to get started!

For investors who must have a human financial advisor, a robo advisor with a human touch is the way to go. This option is like the “have your cake and eat it too” approach to investing. You get access to a personal advisor plus computer algorithms (which help cut total management costs) to manage your investments. Both SigFig and Vanguard offer human financial-advisor help to all their clients. And SigFig allows you to keep your investments where they reside (in TD Ameritrade, Schwab or Fidelity).

Or maybe you already have an account at Fidelity, Vanguard, E*TRADE or Schwab and want to try out their robo advisors.

If you must have tax-loss harvesting or you need a trust account, choose a robo advisor that offers those options. A robo-advisor comparison chart will get you set up to make a feature-by-feature comparison. (We offer a downloadable comparison chart on Robo-Advisor

The universe of robo advisors is large and growing. It’s easy to get sidelined by the many choices. Narrow your search for a robo advisor by homing in on what you really want in an investment manager.

Finally, the benefits of investing with a robo advisor, including low fees and professional management, will be irrelevant if you don’t get started. So do a robo-advisor comparison and start out with the one that best fits your needs.

Editor's Note: Barbara A. Friedberg, MBA, MS is CEO of Robo-Advisor, a fintech review and information website. She’s a former portfolio manager and university investing and finance instructor. Her investing books can be found on Amazon.

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