Many of you are familiar with robo-advisers, which use computer algorithms to provide low-cost asset allocation and build investor portfolios. Some of you are likely using them.
In a report about robo-advisers, Morningstar says they “can be a good fit for early- to midcareer investors who want to further their investment strategy but don't have the means, need, or interest to engage a traditional financial advisor.”
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Robo-advisers generally offer lower fees than financial advisers, accept lower account minimums, and provide strategies to minimize taxes.
As for the drawbacks of robo-advisers, “if you’re still learning the basics about investing, are intimidated by making decisions independently and looking to invest a good amount, it might be smart to work with a human advisor who can guide you,” according to the Morningstar report.
Investors with larger and more complex portfolios also could also benefit from a traditional financial adviser, Morningstar said. That’s especially true for intricate areas like insurance, risk management, estate planning, and retirement drawdown strategies.
Top Robo Advisers
Here’s Morningstar’s ranking of the top five robo advisers, starting with the best.
1. Vanguard Digital Advisor. Overall assessment: high.
“In recent years, Vanguard has introduced environmental, social, and governance options, active equity and fixed-income funds, and a municipal-bond strategy,” Morningstar said.
“Tax-loss harvesting is now available to all advice clients, who also benefit from tax-efficient implementation, including a [service] that helps investors avoid realizing capital gains on existing holdings.”
2. Fidelity Go. Overall assessment: above average.
“Fidelity Go stands out for its simple, straightforward approach that draws on Fidelity's strong global research and asset-allocation team,” Morningstar said.
“Fidelity uses information from a thorough risk-tolerance questionnaire to map investors to a taxable or retirement-focused portfolio, and each portfolio includes seven different risk levels.”
3. Schwab Intelligent Portfolios. Overall assessment: above average.
Among its strengths, “the portfolio-construction process uses an extensive risk-tolerance questionnaire to match investors with portfolios designed for one of 12 risk levels,” the report says. “Plus, the portfolios provide comprehensive asset-class exposure.”
That includes U.S. and foreign large- and small-cap stocks, real estate investment trusts and an array of bonds.
4. Betterment. Overall assessment: above average.
“Betterment's array of services and value set it apart, but investors would be better served sticking to its core offering and avoiding its gimmicky extras like cryptocurrency,” Morningstar says.
“Betterment is one of the few robo-providers that employs a glide path, which gradually adjusts the portfolio's asset mix to become more conservative over time.”
5. Wealthfront. Overall assessment: above average.
“Wealthfront has many strengths, but some strategic shifts and questionable allocations hold it back,” Morningstar says.
“One strength is its low cost. The quality of the underlying funds is also generally strong.” In addition, “The service includes a thorough questionnaire that incorporates behavioral economics research to evaluate both risk tolerance and risk capacity,” Morningstar says.
