Advertiser Disclosure

Investing

Betterment Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Betterment is a well-known company that specializes in robo-investing and helping newbie investors get started. Users add a certain amount of money to their account each month, and Betterment invests it in exchange-traded funds (ETFs) using principles of modern portfolio theory. Recently, Betterment has added more active management features for those with account balances of at least $100,000.

Read on to see if this Betterment review can help you decide whether this robo-advisor is right for you.

Betterment
Visit BettermentSecuredon Betterment’s secure site
The bottom line: Betterment is great for investors looking to get started with minimum fuss — and who aren’t interested in active trading.

  • Get started easily.
  • Set up different investing goals.
  • Benefit from tax optimization.

Who should consider Betterment

Betterment is best for investors who are interested in more of a “set it and forget it” approach to investing. Anyone can benefit from Betterment, but it’s especially helpful for beginner investors hoping to start growing their wealth. It’s also a great resource for intermediate investors looking to accomplish different goals with different “buckets” of money.

Advanced traders also can make use of Betterment as a place for long-term retirement portfolio building, though there is no active trading. Betterment offers a place for assets that are not needed for quite some time to grow at a pace that is likely to track the market as a whole.

Betterment fees and features

Amount minimum to open account
  • $0
Management fees
  • 0.25% for Digital offering (no minimum account balance)
  • 0.40% for Premium offering ($100,000 minimum account balance)
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Current promotions

Three months free for new customers who are referred by an existing Betterment account holder

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
  • Trust
Portfolio
  • 12 asset classes represented in ETF portfolio
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android
Customer supportPhone, Email

Strengths of Betterment

Betterment is always adding new goals and features. Here are some of the most helpful features it currently offers:

  • Tax optimization: Betterment uses tax loss harvesting to help offset taxes on your gains. The company also uses its Tax-Coordinated Portfolio to give you the maximum tax benefit. Certain assets are assigned to your IRA, while others are kept in your taxable accounts.
  • Smart Saver: For people who are interested in a product that’s closer to a savings account, you can divert money to your Smart Saver account, which uses low-risk products in hopes of netting a return that beats traditional and online savings accounts. Betterment can even analyze your bank account and earmark extra cash to add to your investment account.
  • Set up different goals: One of my favorite features is the ability to set up different goals. I have a Traditional IRA rollover as well as a Betterment Roth IRA and a taxable account I use as my travel fund. Set different asset mixes for each type of account and adjust what you add simply and easily.
  • Sync outside accounts: It’s also possible to sync outside investment and bank accounts that aren’t managed by Betterment. The platform will review those accounts and make suggestions for how to maximize the money.
  • Chance to talk to a human: Betterment offers customer service by phone in addition to email. However, you also can set up a call with a financial professional who provides fee-based advice that starts at $149 for a 45-minute call. The Premium plan, for investors with a minimum balance of $100,000, also offers access to financial advisers.
  • Portfolio projection tools: Set goals with the help of Betterment’s projection tools and track your progress toward reaching your objectives. You also can use the tools to tweak your monthly contributions.

Drawbacks of Betterment

While Betterment is a great choice for many investors, it’s not for everyone. There are some drawbacks, and no Betterment review would be complete without mentioning them.

  • Mediocre fees: Betterment pricing, with a 0.25% management fee for the basic Digital account, is in line with many other fee structures. The Premium management fee, for accounts over $100,000 and tailored advice, is 0.40%. That’s lower than many management fees, but it’s disappointing that you don’t get a fee break at that level. You can get a break on Betterment fees when your assets under management reach $2 million.
  • No active trading: If you’re interested in choosing your own investments and actively trading, you won’t be able to do that with Betterment. While you can do a little more self-directed investing with a Premium account, the reality is that you’re mostly limited to choosing your prefered asset mix rather than picking individual investments.
  • Lack of 529 and education savings accounts (ESAs): There are no custodial accounts with Betterment, and you can’t set up a 529 or ESA to save for your child’s education. A similar robo-investing company that does offer a 529 is Wealthfront.
  • No direct IRA rollover: You can roll over your retirement plan from your employer or elsewhere, but Betterment doesn’t handle the transfer. If you want to roll over into a Betterment Roth IRA or Traditional IRA, you need to get an account number from Betterment, ask for a check from the current provider, wait for it to arrive, and then send the check on to Betterment. The process is a little clunky.

Is Betterment safe?

Anytime you invest, there is a chance you could lose money. Poor market conditions can always lead to loss. However, Betterment’s use of modern portfolio theory in its asset allocation helps reduce your exposure to risk. Additionally, Betterment carries SIPC insurance, protecting each of your Betterment accounts up to $500,000 in the event of a failure by the company. (Note that market losses aren’t covered by SIPC insurance.)

In addition to making sure an investment company is SIPC-insured, you also can use the Financial Industry Regulatory Authority’s BrokerCheck to find out about disclosures and actions and search the Consumer Financial Protection Bureau’s Consumer Complaint Database. The Better Business Bureau is also a good source of information.

Final thoughts

Betterment is a great choice for beginner investors looking to get their feet wet and for long-term investors hoping to grow a retirement portfolio. For investors with more than $100,000, it can also be a decent place to keep your money if you’re looking for basic advice.

However, for active traders and those who want a little more control over their assets, Betterment might not be the best choice. Instead, it could make more sense to use platforms like E-Trade and Robinhood if you want to get involved with active trading. Stockpile is also a good choice for investors who want to buy individual Stocks using fractional shares.

Overall, though, Betterment is a great choice for building wealth for the long term, including setting accounts for specific goals and using tools that help you see if you’re on track to meet your objectives.

Open a Betterment accountSecured
on Betterment’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

TAGS:

Advertiser Disclosure

Investing

What Is SIPC Insurance?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you deposit funds at the bank, you can rest easy knowing that the biggest threat to your money is probably your own spending habits. Thanks to the Federal Deposit Insurance Corporation (FDIC), you never have to worry about the safety of your bank deposits. But what about the money your pour into retirement accounts, like an IRA or a 401(k)?

The FDIC protects your covered bank deposits in case the institution goes under and is no longer solvent. This government corporation insures approximately $12.6 trillion dollars across 5,406 institutions in the country. When it comes to retirement accounts, the Securities Investor Protection Corporation (SIPC) protects your funds, although SIPC insurance works somewhat differently than the FDIC’s guarantee.

Read on to find more on exactly how and under what circumstances the SIPC protects your investment accounts.

What does SIPC insurance protect you from?

“SIPC is an important part of the overall system of investor protection in the United States,” said Josephine Wang, CEO of the SIPC. “SIPC works to restore investors’ cash and securities when a brokerage firm fails. Without SIPC, customers at financially-troubled brokerage firms might lose their investments forever.”

In the event that the broker holding your retirement funds goes out of business, SIPC insurance covers up to a combined $500,000 worth of cash and securities, such as stocks and bonds, per account. That protection covers up to $250,000 in cash in the account.

In other words, if you have $400,000 in securities and $100,000 in cash in your brokerage account, and you see on the news that the entire company’s leadership was charged with acting as a front for drug traffickers and the brokerage fails, you can rest easy so long as it registered with the SIPC.

In the above scenario, if your brokerage account had $500,000 in securities and $50,000 in cash, you wouldn’t be fully covered because the total value in the account exceeds the SICP’s $500,000 limit.

For the purposes of the SIPC’s insurance plan, covered securities include:

  • Stocks
  • Bonds
  • Treasury securities
  • Certificates of deposit
  • Mutual funds
  • Money market mutual funds

Some notable investments that SIPC does not cover are:

  • Any investments in foreign currencies
  • Commodity futures (an agreement to buy or sell a certain commodity, such as gold or frozen orange juice, at a specific time and price in the future).

What types of losses are not covered by the SIPC?

SIPC insurance only makes you whole if your brokerage goes out of business. It does not cover losses that stem from the regular ups and downs of markets, which are part of the normal risks and rewards of investing. SIPC insurance won’t help you if your wealth manager makes terrible investment decisions, or if the account underperforms.

Unlike the FDIC, which promises to replace every last penny you lose in an insured account should the bank go under up to its $250,000 per account limit, SIPC insurance doesn’t take into account the value of investments when you purchased them. It only reimburses you for the market value of the investments when the brokerage went under — plus the full value of cash accounts up to the $250,000 cap.

So, if you bought 100 shares of Pets.com at $11 a share in February 2000 but your brokerage firm went under in November 2000 when Pets.com was trading at $0.19 a share, guess what? SPIC insurance is only obligated to return 100 shares at the price the stock currently trades for.

How does SIPC insurance compare to FDIC insurance?

 

SIPC

FDIC

What does it cover?

Securities and cash related to the purchasing and trading of those securities in an account with an SIPC-registered broker

Deposit accounts of an FDIC bank or financial institutions, such as a checking account, savings account, money market account, etc.

What are the limits of coverage?

$500,000 per account (per separate capacity*), with up to $250,000 for cash

$250,000 per account (per ownership capacity/account type)

Does the insurance require customers to opt in?

No

No

*See the section below for a more detailed explanation of “separate capacity.”

What if I have multiple accounts with the same brokerage?

The issue of multiple accounts with the same broker can quickly become confusing. We can’t stress enough that you should consult directly with your brokerage firm or financial institution about how SIPC insurance covers multiple, separate accounts with the same broker.

In general, the SIPC provides you with the maximum amount of coverage for each separate account you have, as long as those accounts are classified as a different type, what is officially termed as “separate capacity.”

Here are some examples of what the SIPC considers a “separate capacity,” which you may recognize as different account types:

  • Individual accounts
  • Joint accounts
  • Corporate accounts
  • Trust accounts created under state law
  • Individual retirement accounts (IRAs)
  • Roth IRAs
  • Accounts held by executors for estates
  • Account held by guardians for a ward or minor

To help clarify this important point, here are a few scenarios where you might have multiple accounts at the same brokerage with SIPC coverage:

  • You have one individual account open in your name: No surprises here, your account is covered up to $500,000.
  • You have two individual accounts open in your name: Because an individual account is one type of “separate capacity,” your $500,000 worth of coverage is spread across both accounts.
  • You have a traditional IRA account and a Roth IRA account: Each of these accounts is treated as a separate capacity, and so each receives the full $500,000 amount of coverage.

The bottom line on SIPC insurance

Just as investing is inherently more risky than putting your money in a deposit account at the bank, the SIPC insurance doesn’t offer the same iron-clad guarantee that the FDIC provides. While SIPC insurance will make sure you get your securities back should your brokerage firm fail, it isn’t concerned with replacing the value of those securities and protecting you from the fluctuations of the stock market.

That said, it still plays an important role in protecting you from a spectacular failure on your broker’s part. Imagine if you lost your shares in Apple or Amazon before its meteoric rise, and the value of SIPC insurance becomes apparent.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

TAGS:

Advertiser Disclosure

Investing

The Best Robo-Advisors of 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re new to the world of investing in stocks and bonds, knowing where to begin can be an intimidating prospect. Robo-advisors could be the best choice to start your investing journey. They make putting money in the market simple and intuitive utilizing smartphone apps and sophisticated computer algorithms.

Robo-advisors invest your money in diversified portfolios of stocks and bonds that are customized to your needs. Since computers do the work, they are able to charge much lower fees than traditional wealth advisors.

They begin the process with a questionnaire to assess your financial goals and your risk tolerance. Based on your answers, robo-advisors purchase low-cost exchange-traded funds (ETFs) for you and adjust the portfolio — or rebalance, as they say on Wall Street — on a regular basis, with no further intervention required from you.

To match your risk tolerance, robo-advisors offer more aggressive portfolios containing a greater percentage of stock ETFs, or more conservative ones containing a greater percentage of bond ETFs. The robo-advisor will also consider your age in developing your portfolio.

How we chose the best robo-advisors

We regularly review the latest robo-advisor offerings — we’ve evaluated 19 different ones in this round — and have selected our top choices. All of the robo-advisors on this list may well be worth considering, with those at the top scoring the best in our methodology.

To determine our list of the best robo-advisors, we focused on management fees and account minimums, and also considered ease of use and customer support.

See our methodology article for details on how we created our rankings.

The top 7 robo-advisors of May 2019

Robo-advisorAnnual Management FeeAverage Expense Ratio (moderate risk portfolio)Account Minimum to Start
Wealthfront0.25%0.09%$500
Charles Schwab Intelligent Portfolios0.00%0.14%$5,000
Betterment0.25% (up to $100,000), 0.40% (over $100,000)0.11%$0
SoFi Automated Investing0.00%0.08%$1
SigFig0.00% (up to $10,000), 0.25% (over $10,000)0.15%$2,000
WiseBanyan0.00%0.12%$1
Acorns$12/yr0.03%-0.15%$5

Wealthfront — Low fees, high APR for cash account

Wealthfront
Wealthfront’s stand-out features are its low annual cost and free financial planning tools. The 0.25% management fee and 0.09% average ETF expense ratio adds up to one of the lowest annual costs on this list. In addition, Wealthfront includes a cash management account with an attractive 2.29% APY.

Wealthfront continues to steal share in wealth management as customers fed up with high fees leave traditional brokerages and wealth advisors. Human interaction is intentionally minimal at Wealthfront: This could be a benefit to those who want to be left alone, or a drawback for those who would prefer personal attention or who have complicated tax situations.

Wealthfront’s key attributes:

  • Fees: Management fee of 0.25%, plus 0.09% avg ETF expense ratio
  • Minimum starting deposit: $500
  • Investing strategy: Wealthfront invests your money in one of 20 different automated portfolios. Each portfolio is a different mix of 11 low-cost ETFs, which are rated with risk scores from 0.5 (least risk) to 10.0 (most risk).
  • Average annual return over the past five years: 5.40% per year, based on Wealthfront’s mid-level 5.0 risk score.
  • Other notable features: Tax-loss harvesting (see below for a full explanation of tax-loss harvesting) comes standard, also includes an FDIC-insured cash management account yielding 2.29% APY.

LEARN MORE

Charles Schwab Intelligent Portfolios — Brand-name brokerage

Charles Schwab
Intelligent Portfolios can be a smart choice, but do not be misled by the 0% management fees — investing with this robo-advisor still comes at a cost. Intelligent Portfolios requires users to hold 6% to 30% of deposited funds in cash at a 0.70% APY, which will eat into overall returns in years where the market returns above 0.7%. This is on top of an average 0.14% expense ratio for a moderate portfolio. The $5,000 minimum deposit to open an account may also be too high a bar for investors just starting out.

That said, Intelligent Portfolios has an exceptionally detailed description of their ETF selection methodology, and a major brokerage like Schwab can be a good launchpad for folks who anticipate getting deeper into investing. Intelligent Portfolios users get access to Charles Schwab’s 300 U.S. branch locations where you can talk to advisors and handle administrative tasks in person.

Key attributes of Intelligent Portfolios:

  • Fees: Zero management fee, but customers must hold 6% to 30% of their portfolio in cash at 0.7% APR, plus 0.14% avg ETF expense ratio.
  • Minimum starting deposit: $5,000
  • Investing strategy: Schwab invests your money in a custom portfolio with two main components: ETFs representing up to 20 different asset classes, including stocks and bonds; and cash, in the form of a FDIC-insured cash sweep program earning 0.7% APY. Cash must be between 6% and 30% of the portfolio.
  • Average annual return from 3/31/2015 to 12/31/2018: 3.1% per year for medium-risk portfolio
  • Other notable features: Tax loss harvesting available for accounts over $50K, includes access to in-person assistance at over 300 U.S. branch locations.

Learn More

Betterment — Low fees for balances under $100K

Betterment
Betterment offers a full suite of robo-advisor features at low cost with no minimum deposit. The annual management fee for accounts under $100,000 is 0.25%, plus an average 0.11% expense ratio. Unfortunately, accounts over $100,000 will see the annual management fee jump to 0.40%. One advantage Betterment gives to accounts above the $100,000 threshold is that they can actively manage some assets. If active management is your goal, though, you can avoid Betterment’s 0.40% fee by opening a free brokerage account — so if you are managing more than $100,000, you may want to consider a different robo-advisor.

Betterment’s key attributes:

  • Fees: If total balance is less than $100,000, the annual management fee is 0.25% of assets; for balances over $100,000, management fee rises to 0.40% of assets. The average ETF expense ratio is 0.11% (for a 70% stock and 30% bond portfolio).
  • Minimum starting deposit: $0
  • Investing strategy: Betterment invests your money in an automated portfolio comprised of stock and bond ETFs in 12 different asset classes.
  • Average annual return over five years: 6.2% per year on a 50% equity portfolio (July 2013 to July 2018).
  • Other notable features: Tax-loss harvesting comes standard; active management features for clients with $100,000+ balance; several premium portfolios available.

Learn More

SoFi Automated Investing — Low costs, great perks

SoFi
SoFi Automated Investing’s 0.00% management fee and ultra-low 0.08% average expense ratio makes it one of the most competitively-priced robo-advisors in the market. Valuable perks come with opening a SoFi account, including free access to SoFi financial advisors, free career counseling and discounts on loans.

Automated Investing’s main downside is that their portfolios are less customizable than its peers’, with only five different risk levels to choose from, as opposed to at least 10 available from others. SoFi does not offer tax loss harvesting yet, though this may change in the near future.

SoFi Automated Investing’s key attributes:

  • Fees: Zero management fee, plus 0.08% avg expense ratio.
  • Minimum starting deposit: $1
  • Investing strategy: All SoFi Automated Investing portfolios are actively managed. This means that real humans at SoFi decide the makeup of the five model portfolios, which they believe will add value beyond what passive investing offers. SoFi invests your money in one of five portfolios of low-cost ETFs, covering 16 different asset classes. Each of the five portfolios has two versions: one is for taxable accounts and the other for tax-deferred or tax-free accounts, like IRAs and Roth IRAs. SoFi only rebalances portfolios monthly, versus some peers which check for this opportunity daily.
  • Average annual return over five years: 6.78% per year on the moderate risk portfolio (60% stocks / 40% bonds).
  • Other notable features: Commission-free stock trades in separate Active Investing accounts. SoFi’s combined checking/savings product, SoFi Money, offers 2.25% APY on deposits. Customers must open this account separately.

Learn More

SigFig — Free access to advisors

SigFig
Free access to financial advisors by phone and 0.00% management fees on the first $10,000 deposited are SigFig’s biggest strong points. On deposits over $10,000, management fees rise to 0.25%. Expense ratios are on the high side compared to the competition, at an average of 0.15%.

One of SigFig’s peculiarities is that they do not hold your assets. If you open a new account, SigFig will open an account at TD Ameritrade for you and then manage it. Current TD Ameritrade, Fidelity and Charles Schwab customers can also use SigFig’s robo-advisor services.

The $2,000 minimum deposit may put SigFig out of reach for some, but SigFig is worth a look for investors looking to keep robo-advisor costs low.

SigFig’s key attributes:

  • Fees: Zero annual management fee for the first $10,000; management fee rises to 0.25% of assets on balances over $10,000. Average ETF expense ratio of 0.15%, depending on allocation.
  • Minimum starting deposit: $2,000
  • Investing strategy: SigFig invests your money in an automated portfolio based on how you indicate you want to invest. Each portfolio is made of ETFs from Vanguard, iShares and Schwab, comprising stocks and bonds in nine different asset classes. The specific ETFs SigFig invests in will vary based on whether your account is held at TD Ameritrade, Fidelity, or Schwab.
  • Average annual return over five years: 5.45% per year for moderate portfolio (as of 4/24/2019)
    Other notable features: SigFig has a free portfolio tracker that allows investors to track their entire portfolio’s performance across multiple brokers.

Learn More

WiseBanyan — No-frills choice for beginners

WiseBanyan
A 0.00% management fee for core robo-advisor functionality makes WiseBanyan a good choice for beginning investors who can get by with a no-frills offering. Make sure to notice that they still charge a 0.12% average ETF expense ratio, so it is not completely free.

WiseBanyan charges premiums for features that come standard with other robo-advisors, including tax loss harvesting (0.24% of assets up to $20/month max), expanded investment options ($3/month) and auto-deposit ($2/month). If you care about these other features, do the math based on your own portfolio size to compare WiseBanyan to its peers.

WiseBanyan’s key attributes:

  • Fees: Zero management fee, plus average ETF expense ratio of 0.12%. Premium features carry additional fees and higher expense ratios.
  • Minimum starting deposit: $1
  • How WiseBanyan invests your money: For basic Core Portfolio users, portfolios comprise ETFs across nine asset classes, with an average expense ratio of 0.03% to 0.69%. If you upgrade to the Portfolio Plus Package, you gain access to 31 total asset classes with exposure to ETFs tracking oil and gas, precious metals and other industries, with an average expense ratio of 0.03% to 0.75%.
  • Average annual return over five years: Not provided
  • Other notable features: Premium offerings, including tax loss harvesting (0.24% /month up to $20/month max), Fast Money auto-deposit ($2/month) and Portfolio Plus ($3/month).

Learn More

Acorns — Unique savings functionality

Acorns
By rounding up the spare change from your transactions and placing it into an investment account, Acorns provides a clever way to get started with investing. The main drawback is that, until you have more than $4,800 deposited in an Acorns Core account, the $1/month fee will actually be proportionally higher than the 0.25% management fees that most competitors charge.

Acorns does not offer tax loss harvesting, joint accounts, or access to financial advisors currently. Still, if you’re looking for an easy way to start investing, give Acorns a shot.

Key attributes of Acorns:

  • Fees: $1/month for Acorns Core, plus ETF expense ratios ranging from 0.03% to 0.15%
  • Minimum starting deposit: $5
  • How Acorns invests your money: Acorns invests your money in one of five automated portfolios— notably, this is a more limited number of portfolios than some other competitors. Each portfolio comprises ETFs across seven asset classes.
  • Average annual return over past five years: Not provided
  • Other notable features: Offers two add-on accounts for expanded functionality with Acorns Later retirement product ($2/month) and Acorns Spend checking account ($3/month).

Learn More

What is a robo-advisor?

A robo-advisor is a service that uses computer algorithms to invest customers’ money in portfolios customized to their needs. Since robo-advisors create these portfolios using automated algorithms, they can charge a fraction of what human advisors do and still offer advanced benefits like auto-rebalancing and tax-loss harvesting to boost overall returns. Most robo-advisors start with a questionnaire to assess your financial goals, risk tolerance and assets. Based on the answers, the robo-advisor allocates your investments accordingly.

How do I choose the right robo-advisor?

When considering which robo-advisor to choose, you should focus on management fees, minimum balances, ease of use and customer support. The lower the fees, the more money stays in your account. The top robo-advisors typically charge a flat management fee of 0.00% to 0.50% of your deposited balance. In addition, you pay an expense ratio to cover the fees charged by the companies offering the ETFs that comprise your investment portfolio. Note that some robo-advisors claim to offer zero management fees, but still charge an expense ratio.

Make sure you are comfortable leaving your deposits with a robo-advisor for the medium to long term — think five to eight years. There are a number of robo-advisors with $0 account minimums and most are under $5,000 today.

How do I open a robo-advisor account?

Most robo-advisors can have you up and running with an account in a few minutes. Typically you create a username, fill out a questionnaire to assess your financial goals and risk tolerance and connect your profile to a bank account. There may be some additional steps required for verification depending on the robo-advisor.

What other features should I consider?

Robo-advisors offer a host of additional features, including tax loss harvesting, cash management options, checking accounts and rewards programs. Cash management can provide a meaningful compliment for users who keep some of their portfolio in cash. Some robo-advisors offer an APY of more than 2.00% on cash management accounts. Tax loss harvesting can make a difference for users looking to lower tax exposure.

What is tax loss harvesting?

Tax loss harvesting is a tax strategy that some robo-advisors offer to help clients reduce their tax bill. Generally, this involves selling an asset that has lost value for a loss, using that loss to offset capital gains taxes or income taxes, then purchasing a similar but not “substantially identical” asset to maintain exposure to the asset class. The details behind each robo-advisor’s strategy can get complicated and should be looked at in detail to make sure you understand what you are getting into.

Capital losses from tax loss harvesting can be used to offset capital gains and can potentially offset up to $3,000 (or $1,500 if married and filing separately) of ordinary income.

What if my robo-advisor goes out of business?

While not a pleasant thought, it is possible that a robo-advisor could go out of business. Most robo-advisors insure clients’ assets through the Securities Investor Protection Corporation (SIPC). This is different from the bank account coverage provided by the FDIC; generally, SIPC coverage includes up to $500,000 in protection per separate account type, with up to $250,000 of cash assets protected.

Keep in mind that the SIPC will take necessary steps to return securities and account holdings to impacted clients, but will not protect against any rise or fall in value of those holdings. This means that if you make a bad investment in a stock, the SIPC ensures you still own that bad stock, but do not replace losses from a poor investment. Some brokers also insure assets beyond the $500,000 in SIPC coverage through “excess of SIPC” insurance.

See the full list of SIPC members at their site, along with a detailed explanation of how SIPC coverage works.

The bottom line

Robo-advisors can be an excellent option for users who are starting their investing journeys, rolling over a 401(k) or who want to minimize the time needed to manage their investments. By creating a customized portfolio based on your financial goals and automatically rebalancing your account, a robo-advisor can help to maximize your return while taking on the right amount of risk.

Because robo-advisors run off of automated algorithms, you should be comfortable with little or no human touch for your investments. The upshot to low human interaction is that fees are generally much lower than with a registered investment advisor, which may be worth the tradeoff as part of an overall financial plan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Avatar
Joshua Rowe |

Joshua Rowe is a writer at MagnifyMoney. You can email Joshua here

TAGS: