# The Magic of Compound Interest, Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

“Interest” isn’t always the nicest word. When you borrow money or use your credit card, you pay it back with interest. This is the cost of borrowing. But when you’re investing, the more interest you earn, the more money you make. This is the perk of investing.

While earning interest on your investment is nice, why not let your interest work for you? That’s where compound interest comes in.

### What is compound interest?

Compound interest is the interest you earn on your interest — in other words, it’s money you earn on the money you’ve already earned.

Compound interest is important because you’re earning twice: once on the principal and once on the interest. The alternative is simple interest, which is the money you’ve earned only on the principal.

### How does compound interest work?

Before learning how compound interest works, it’s important to know what simple interest is. If you have \$1,000 in a simple interest savings account with a 5% interest rate, you’ll earn \$50 each year. After three years, you’ll have a total of \$1,150.

Simple Interest
 Year 1 \$1,000 x 5% = \$50 Year 2 \$1,000 x 5% = \$50 Year 3 \$1,000 x 5% = \$50 Total amount: \$1,000 + \$150 = \$1,150

Pocketing an extra \$150 is great, but compounding interest could earn you more. Let’s say you have the same \$1,000 original investment with 5% interest compounded annually. You’ll earn \$50 that first year. The second year, however, you’ll earn interest on the additional \$50 you received last year, earning a total of \$52.50 in year two. The third year, you’ll earn \$55.13. After three years, you’ll have \$1,157.63.

Compound Interest
 Year 1 \$1,000 x 5% = \$50 Year 2 \$1,050 x 5% = \$52.50 Year 3 \$1,102.50 x 5% = \$55.13 Total amount \$1,102.50 + \$55.13 = \$1,157.63

While an extra \$7 might not seem like a lot, especially throughout three years, imagine what your return would be for \$10,000.

 Year 1 \$10,000 x 5% = \$500 Year 2 \$10,500 x 5% = \$525 Year 3 \$11,025 x 5% = \$551.25 Total amount \$11,025 + \$551.25 = \$11,576.25

The compound interest you earn on \$10,000 over three years is \$1,576.25. The more money you earn over time, the more your money will grow. In 10 years, you will have \$16,288.95 and your original investment will have grown by 62% — without you adding another dime.

While it’s best to continue to add to your investments as much as you can, it might not always be possible. The major perk of this is that even if you didn’t add any more money to your account, your balance would still increase.

## What factors determine how much you earn with compound interest?

When you want to build on your compound interest, here’s what affects how much you earn:

• Initial investment. This is the money you originally put in. Think of the \$1,000 or \$10,000 from earlier.
• Monthly contribution. This is how much you’re going to add to your account every month to build on that initial investment. It’s not required but encouraged.
• Length of savings. How long are you planning to save money in this account? The longer your money is allowed to accumulate interest, the more you’ll earn.
• Interest rate. This is how much your money earns each period, and varies depending on the lender. Consider our 5% example from earlier.
• Compound rate. This is how often your interest will compound. For instance, your interest may compound annually, semiannually, monthly or daily. The more frequently interest compounds, the more beneficial it is for the person earning interest.

Since the interest and compound rates vary by institution, your return will be different based on the lender you choose.

### How to harness the power of compound interest

If you’re trying to make the most of your money through compound interest, there are a few steps you can take to get the most bang for your buck.

• Find a high-yield savings account. The lender with the highest interest rate means you get the highest return. Some lenders have an account minimum, so make sure you have the cash to meet this before signing up.
• Reinvest interest. Take the interest you earn and put it to work. Reinvest your interest by putting it back into your investment accounts. The more you put into your investments, the better rate of return.
• Look for low monthly fees. Is your bank or broker charging you to maintain your account? Find a place that doesn’t take a lot of your money for operating costs.
• Try to make regular contributions. Money that you earn in interest is a sweet deal. But it can be sweeter if you have even more cash to earn interest on. Remember the difference between \$1,000 and \$10,000.

### Take advantage of compound interest

For risk-averse savers, leveraging compound interest is an easy way to grow their cash. High-yield savings accounts that offer this can be a savvy place to stow your emergency fund or other money you’re not willing to risk.

But if you’re looking to grow your money for major goals, a savings account might not be enough for you. Even a conservative investment account through a robo-advisor might yield a higher average return than an account that offers compound interest.

Compound interest accounts are a great way to have your money work for you, but not all firms and lenders offer the same benefits. See which ones have low fees and put the most money possible toward your investments. Your desired return on investment might choose for you.

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.

# Review of Vanguard Personal Advisor Services

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Vanguard Personal Advisor Services is the investment advisory service offered through Vanguard Advisers, a wholly owned subsidiary of Vanguard, Inc., one of the world’s largest investment management firms. Vanguard Personal Advisor Services focuses on serving individual investors, including high net worth individuals. Clients work with human advisors, but also have access to Vanguard’s digital advice platform.

All information included in this profile is accurate as of April 2, 2020. For more information, please consult Vanguard Personal Advisor Services website.

 Assets under management: \$83.7 billion Minimum investment: \$50,000 Fee structure: A percentage of AUM; one-time financial planning fee for some workplace retirement plan participants Headquarters: 100 Vanguard Boulevard Malvern, PA 19355vanguard.com 800-416-8420

### Overview of Vanguard Personal Advisor Services

Vanguard Personal Advisor Services is the investment advisory arm of Vanguard Advisers, a wholly owned subsidiary of Vanguard. The advisory part of the business launched in 2015, decades after Vanguard was founded in 1975 by the late John “Jack” Bogle.

Bogle introduced the first-ever index fund to retail investors and encouraged them to buy and hold a diverse basket of low-cost investments. Though Bogle passed away last year, the firm aims to continue his legacy.

Vanguard Personal Advisor Services is focused on providing ongoing advisory account services for individual investors as well as point-in-time financial planning for retirement plan participants. Vanguard Personal Advisor Services oversees \$83.7 billion of Vanguard Advisers’ total \$221 billion in assets under management (AUM).

### Which types of clients does Vanguard Personal Advisor Services serve?

Vanguard Personal Advisor Services primarily serves individuals, including high net worth investors and those who get services through their workplace retirement plans. For reference, the SEC defines high net worth individuals as those with at least \$750,000 under management or a net worth above \$1.5 million.

The individual investors either come for financial planning via their workplace 401(k) plans, or they are retail investors with an IRA or other account with Vanguard. In the latter case, there’s a minimum investment requirement of \$50,000. The firm does not provide financial planning services to clients who do not have accounts with Vanguard.

### Services offered by Vanguard Personal Advisor Services

Vanguard Personal Advisor Services offers financial planning and point-in-time advice to participants in Vanguard workplace retirement plans. Those participants are not eligible for managed account services for assets in those plans.

Clients who have an IRA or other retail account worth at least \$50,000 with Vanguard can use Vanguard Personal Advisor Services to get a customized financial plan and enroll in the firm’s “ongoing advised services.” That gives an advisor the authority to make trades on the client’s behalf in accordance with their agreed-upon plan. It also allows participants to call advisors about advice on financial issues that arise as they hit life’s milestones, such as buying a new house or having grandchildren.

Here is a full list of services offered by Vanguard Personal Advisor Services:

• Asset allocation strategies
• Financial planning
• Retirement planning
• Estate planning
• Charitable giving
• Succession planning
• Tax planning and management

All participants in Vanguard Personal Advisor Services get a financial plan, including the creation of a portfolio with a diverse asset allocation that reflects your personal financial situation, goals and risk tolerance. To do that, the advisors rely on an algorithm, which recommends an investing track and glide path, or asset allocation strategy, that meets your needs. The investment tracks range from very conservative to very aggressive, and the glide paths adjust over time, depending on your goals.

Each portfolio includes a variety of Vanguard index funds with holdings in a specific asset class, such as international stocks or short-term bonds, but it does not recommend investments in individual stocks or bonds. In addition to diversification, the portfolios take taxes into account, aiming to keep the investments as tax-efficient as possible. In general, Vanguard encourages a long-term, buy-and-hold approach rather than switching strategies based on market performance.

### Fees Vanguard Personal Advisor Services charges for its services

Employees who use Vanguard Financial Planning Services through their workplace retirement plan pay \$1,000 for the service if they have less than \$50,000 in assets with Vanguard, and \$250 if they have \$50,000 to \$500,000 with Vanguard. The firm may waive that fee for clients who are over the age of 55 or who have more than \$500,000 invested with Vanguard.

For clients of Vanguard Personal Advisor who don’t have a workplace retirement plan and are enrolled in the ongoing advised services, the firm charges a percentage of assets under management. Rates run from 0.30% for accounts of less than \$5 million to 0.05% for accounts over \$25 million.

Assets under managementAnnual rate
Under \$5 million0.30%
\$5 million to under \$10 million0.20%
\$10 million to under \$25 million0.10%
\$25 million and over0.05%

In addition to the above fees, you may also pay fund fees, annuity fees, account fees or retirement plan fees.

### Vanguard Personal Advisor Services’s highlights

• A dedication to low fees. Vanguard literally invented index investing, and the firm remains dedicated to keeping its fees low. Its fee schedule is substantially lower than the industry average total fee rate of 1.17%, according to RIA in a Box.
• Excellent reputation. Vanguard Personal Advisor Services was named the “Brand of the Year” in 2019 for digital investing by Harris Poll EquiTrends. The title was awarded based on consumer devotion and respect.
• Fee-only model. Advisors don’t receive commissions for selling products or making recommendations, so they do not have a financial incentive to do so, which can pose a potential conflict of interest.

### Vanguard Personal Advisor Services’s downsides

• High minimum balance for young investors. You need to have \$50,000 invested with Vanguard (outside of your workplace retirement plan) to access its investment management services if your employer is not enrolled in the program. That could be a high bar for young investors or for those who haven’t been saving for long.
• Less potential upside: Since Vanguard’s investment philosophy is built on a buy-and-hold strategy comprised of low-cost funds, you can expect your investments to perform in line with the markets, but advisors aren’t actively trading to try to “beat the market.”
• Large digital component: While you’ll work with a human advisor to create your initial plan, future check-ins may take place via the platform’s digital interface. Clients with \$500,000 or less in assets do not have an assigned financial advisor, though they can call to schedule an appointment at any time.

### Vanguard Personal Advisor Services disciplinary disclosures

Vanguard Personal Advisor Services does not have any disciplinary disclosures. All registered investment advisors are required to disclose any legal, regulatory or criminal events in their Form ADV, documents they file with the SEC.

### Vanguard Personal Advisor Services onboarding process

If your portfolio is worth less than \$50,000, you’ll work with a team of advisors, while those with a portfolio worth more than \$500,000 have a specific, dedicated financial advisor. Advisors will check on your portfolio on a quarterly basis, making adjustments as needed to your asset allocation. You can check in online or call your advisor or team at any time.

### Is Vanguard Personal Advisor Services right for you?

The firm may be a good choice if you’re an investor with at least \$50,000 looking for a low-cost, low-maintenance way to manage your money (or your employer has chosen Vanguard as its retirement plan provider). Vanguard Personal Advisors offers extremely low fees and boasts a clean disciplinary record.

For investors who have less than \$50,000, or who are looking for a more active approach to asset management, another firm might be a better fit. As is always the case when choosing a financial product or service, it’s important to shop around, ask questions of financial advisors and make the choice that’s best for your unique situation.

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.

# The 7 Best Robo-advisors of 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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.

## The top 7 robo-advisors of 2020

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

Management Fees

0%

Account Minimum

\$100 one-time deposit or \$20 monthly deposit

Promotion
N/A
Management Fees

0.25%

Account Minimum

\$0

Promotion

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

Management Fees

0.30%

Account Minimum

\$100

Promotion

N/A

### Wealthfront — Low fees, high APR for cash account

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 0.26% 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 0.26% APY.

### Charles Schwab Intelligent Portfolios — Brand-name brokerage

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.

### Betterment — Low fees for balances under \$100K

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.

### SoFi Automated Investing — Low costs, great perks

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 1.10% APY on deposits. Customers must open this account separately.

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.

### WiseBanyan — No-frills choice for beginners

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).

### Acorns — Unique savings functionality

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).

### 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.

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.