Advertiser Disclosure

Investing

How to Invest in Index Funds

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.

business man with coins in hand
iStock

Few investment products become popular enough to make it into the general lexicon, but everyone seems to be talking about index funds these days. Index funds have doubled their share of asset management dollars since the financial crisis of 2008 ended, and they could surpass actively managed mutual funds in popularity as soon as 2024, according to Moody’s Investors Service. Even Warren Buffett, one of history’s most successful active investors, regularly touts index funds as the only strategy the average investor really needs.

Despite the buzz, index funds are not the most exciting investments at first glance. They are passive and powered by a computer model — without a manager attempting to pick winning holdings or to get rid of losers when they are down. Instead, an index fund tracks the performance of a set group of companies included in a major market index and produces returns in line with that benchmark.

An S&P 500 index fund, for example, provides exposure to the 500 largest publicly traded companies in the U.S. that make up the S&P 500. It’s like buying the performance of the benchmark U.S. stock market — and at a very low cost. With an index fund, you generally won’t outperform or underperform a given market, as you own the market.

Why investing in index funds has become so popular

While they may not be the kinds of investments you brag about, index funds consistently outperform hot-shot actively managed mutual funds over time.

Here are four reasons passive investing is winning out.

Index funds are low-cost

“One of the major factors to investing success is fees,” said Joseph A. Carbone Jr., a certified financial planner with Focus Planning Group in Bayport, New York. Lower fees help boost performance in any market because you are losing less of your investment to the cost of the fund. Without an expensive fund manager to pay, index funds charge an average annual expense ratio of 0.09%, compared to an average of 0.59% for actively managed mutual funds, according to the Investment Company Institute. At the extremes, Fidelity, the giant broker typically known for its actively managed mutual funds, offers no-fee index funds. Actively managed funds can charge as much as 2.5% in annual expenses, not including added sales charges.

Index funds are consistent

Mutual fund managers are sometimes guilty of “style drift,” or diverging from intended investment categories, which can impact the fund’s underlying asset allocation and risk profile. With index funds, the investments are set, so there is no risk of drift.

Active management isn’t adding value

For the past 15 years ending in June 2018, 92.43% of large-capitalization mutual fund managers, 95.13% of mid-cap managers and 97.70% of small-cap managers failed to outperform index benchmarks on a relative basis, according to midyear data from SPIVA. With those odds, why pay a stock or bond picker in an attempt to beat the market?

There are tax advantages to investing in index funds

“Passively managed investing is a lot more tax-efficient than actively managed,” said Carbone. Managers are able to buy and sell assets to take advantage of market opportunities, but that trading creates taxable capital gains, which can be a drag on performance. Because indexes generally shift infrequently, trading within index funds happens a few times a year at most.

What are the downsides to index funds?

Plenty of professional investors will tell you that index funds have their downsides. Here are a few of the most common arguments.

Index funds aren’t strategic

Many of the strategies that fuel market success stories — stock picking, concentrated positions, value investing, hedging — are not as easy to index.

They don’t weather downturns

Unlike a mutual fund, an index fund is not able to react when markets turn volatile. This should help actively managed funds handle downturns better than nonreactive index funds.

According to a 2018 analysis by Morningstar, the odds of an active U.S. equity fund beating its benchmark are almost twice as good during “down” market periods, regardless of asset class. It also found that funds that beat the benchmarks during down periods do so by a wider margin than in “up” markets. However, that performance was not sustained, and those funds that did well during a single three-year period tended do badly the following period.

Index funds may not be best for every asset class

OK, so maybe a manager can’t add value in the large domestic stock market, which is so well covered by analysts that there’s virtually no way to have an edge on other investors. But what about, say, small-cap international stocks? Surely there are managers who can uncover something there or in similar markets we don’t know much about.

For some years, this is true. In 2017, 55% of managers in foreign large-cap blend and diversified emerging markets funds beat their benchmarks, up from 36% in 2016, according to Morningstar. Active U.S. small-cap managers did well in 2017 too, with 48% of them beating their benchmarks, up from 29% in 2016. “In theory it makes sense, but the numbers don’t bear this out,” said Carbone. Over the long term, however, asset managers lag significantly in most asset classes.

They can be boring to some people

If your idea of fun is buying individual stocks in the hope of finding the next Apple or Netflix, index funds probably are not your speed. On the other hand, some financial advisors prefer index funds because they feel like less of a gamble than other investments.

Index funds vs. mutual funds vs. ETFs

Mutual funds are actively managed, while index funds are passive. Otherwise, the two investments are fairly similar. Then there are exchange-traded funds (ETFs), which are index investments that trade on the stock exchange.

How to make sense of it all? Here’s a chart to help you compare the differences.

 Mutual FundIndex FundETF

What is it?

A pool of money through which large groups of investors can own a variety of stocks, bonds or other assets strategically selected by an asset manager or management team.

A pool of money through which large groups of investors can track the performance of a stock or bond market index. An index fund is a type of mutual fund without a manager.

A security that tracks the performance of a stock or bond market index or selection of assets. Think of an ETF as an index fund-stock hybrid.

How often can you trade?

Once a day at net asset value (NAV) or daily share price.

Once a day at net asset value (NAV) or daily share price.

All day at intraday share price.

Where can you buy it?

Purchase directly from a mutual fund company or through a broker.

Purchase directly from a mutual fund company or through a broker.

Trade shares on the stock exchange through a broker or online brokerage account.

How do you pay for it?

Through an ongoing expense ratio or percentage of assets. The average expense ratio for equity mutual funds is 0.59% per year. Some mutual funds have sales loads or commissions paid when you buy or sell shares.

Through an ongoing expense ratio or percentage of assets. The average expense ratio for index equity funds is 0.09% per year.

Through an ongoing expense ratio or percentage of assets. Index equity ETF expense ratios average between 0.20% and 0.50%. There are also trading fees when you buy and sell.

What’s the minimum investment?

Typically $500 to $3,000. Fidelity has no minimum investment funds.

Typically $500 to $3,000. Fidelity has no minimum investment funds.

None, other than the cost of a share plus the cost to trade it.

Source: 2018 Investment Company Fact Book

Carbone uses ETFs to build portfolios for clients but doesn’t always recommend them for the individual investor. “There’s a lot less that can go wrong when you’re purchasing a mutual fund or index fund versus an ETF.” said Carbone. “A mutual fund is much more user-friendly.”

How to select an index fund

Ready to invest in an index fund? These three steps can get you started.

1. Find a fund company

You can purchase an index fund directly from a mutual fund family, such as Vanguard, the company that pioneered index funds. Firms such as Schwab and Fidelity offer index funds and are large enough to offer products to handle all your investment needs. Keep in mind that index funds don’t really vary from firm to firm. So look for a provider with a good reputation for offering low-cost, no-load funds.

You also can purchase an index fund through a broker, and some discount brokerages will trade mutual fund shares without a transaction fee. If you still can’t decide, compare a couple of options and pay attention to things such as the expense ratio, minimum initial investment and account minimum. Vanguard and Schwab both offer a wide range of low-cost index products with relatively low minimums. Fidelity offers a handful of no-fee, no-minimum accounts, but the fund giant still makes its money through active investing.

2. Select your index

A recent finding by the Index Industry Association found that there are almost 3.3 million stock indexes around the world.

Where is a good place to start? Buffett recommends a simple S&P 500 index fund for the average investor. Or you can get even broader exposure through the total-market Wilshire 5000. Looking for just small caps? The Russell 2000 represents the smallest U.S. stocks. Looking for global exposure? The MSCI global equity index is popular with international investors.

You also can choose between equal-weighted and market-weighted index funds. Market weighted means the companies are represented according to their market value, with the largest companies representing a greater portion of the index. With an equal-weighted index, all companies are represented equally. Each strategy has its benefits: Market weighting tracks more closely to the market’s performance, but equal weighting helps reduce your risk and tends to outperform over time.

3. Balance your assets

Should you buy just one, or is it better to buy multiple index funds? For investors who want to keep things simple, a single broad domestic index fund, such as an S&P 500 fund, is a good start. But if you’re ready to diversify, you can build a world-class equity portfolio with as few as three index funds, said Carbone.

Start with an S&P 500 and add an international equity stock index, such as MSCI, he said. “This gives you global diversification.” For a bond portion, Carbone recommended a Barclays investment-grade bond index fund, a common benchmark for bonds.

How much you put into each fund will depend on your own goals and risk tolerance, but the three components represent all the diversification you need at a combined cost of less than one percentage point.

Bottom line

Any active manager or investment trader will tell you that outperforming the market is not easy to do. Take fees into account, and an active manager has to work even harder to beat a passive investment. So why not consider jumping on the index fund bandwagon? This is one popularity contest investors can win.

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.

Melissa Phipps
Melissa Phipps |

Melissa Phipps is a writer at MagnifyMoney. You can email Melissa here

Advertiser Disclosure

Investing

Profile of BBR Partners

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.

With 115 employees across offices in New York, San Francisco and Chicago, BBR Partners works with extremely wealthy families and individuals — the minimum investment with the firm is generally $20 million. BBR partners currently manages nearly $16 billion for around 1,200 clients, working with them to create and execute a portfolio strategy with an emphasis on tax efficiency using third-party managers. BBR Partners also consolidates record keeping for its clients, allowing them to see the performance of their entire portfolio at a glance.

All information included in this profile is accurate as of November 26th, 2019. For more information, please consult BBR Partners website.

Assets under management: $15,886,200,000
Minimum investment: $20 million
Fee structure: Percentage of assets under management, performance-based fees
Headquarters: 140 East 45th Street
New York, N.Y. 10017
212-313-9870
https://www.bbrpartners.com/

Overview of BBR Partners

Founded in 1999, BBR Partners is a privately held multifamily office principally owned by Brett Barth and Evan Roth. The firm also has 17 equity partners. Co-founders Mike Anson and Todd Whitenack serve as BBR Partners’ chief compliance officer, and head of investment research, respectively.

BBR Partners has 115 employees across offices in New York, Chicago and San Francisco, 75 of whom perform investment advisory functions. The firm’s 17 partners have diverse backgrounds, including several lawyers, accountants and MBAs. Rather than directly managing client money, BBR works with third-party investment managers throughout the industry.

What types of clients does BBR Partners serve?

With a minimum account balance generally set at $20 million, BBR Partners focuses primarily on serving ultra-high net worth families and individuals, but it also works with their associated family partnerships, foundations and charitable organizations. The firm serves entrepreneurs, Fortune 500 and finance executives, and those with inherited wealth.

Services offered by BBR Partners

BBR Partners works with wealthy individuals and families to develop an asset allocation strategy based their investment objectives, selecting and hiring managers to put the tailored strategy to work. While asset allocation remains the firm’s primary focus, it may also offer guidance on other issues, including estate and tax planning, charitable planning and insurance planning.

The firm also offers comprehensive reporting services, allowing clients to see their entire financial picture, including assets under management by other firms.

  • Investment advisory services
  • Financial planning
    • retirement planning
    • trust and estate planning
    • charitable planning
    • education planning
    • tax planning and management
    • IRA and 401(k) rollovers
  • Insurance/risk management
  • Comprehensive reporting services
  • Collaboration with clients’ lawyers, accountants, etc.
  • Miscellaneous services, such as helping wealthy families vet their employees or connect with labor lawyers

How BBR Partners invests your money

BBR Partners crafts individual portfolios for each of its family clients with a variety of asset classes and strategies. Based on that family’s objectives, the portfolio will include a mix of individual equity and fixed-income investments, third-party managers, exchange-traded funds, exchange-traded notes and private investment funds. The same applies to individuals.

The firm uses a mix of passive and active strategies, as well as illiquid investments, with a focus on the after-tax returns of the total portfolio. It also offers socially responsible and values-based investing options to interested families.

Fees BBR Partners charges for its services

BBR Partners charges investment advisory fees that are based on a percentage of assets under management, with a minimum annual fee of $150,000:

Investment value of portfolio Fee (% of assets)
First $30 million 0.75%
More than $30 million — $150 million 0.50%
More than $150 million negotiable

Clients who invest in BBR-administered private investment vehicles pay an additional fee, ranging from 0.35% to 1.00%, on the balance of their investment in that fund. They also pay additional fees to any third-party managers, broker-dealers or custodians who manage their money.

BBR Partners highlights

  • One of the largest RIA firms (by asset size) in the Northeast, BBR Partners, consistently ranks among the top 10 firms on Barron’s list of top RIA firms.
  • BBR Partners acts as a “manager of managers,” which means it selects other firms to make investments for its clients. This BBR can offer a greater diversity of investment options while reducing the potential for conflicts of interest.
  • Turnover at BBR Partners is low — none at the partner level in its 20-year history.
  • BBR Partners does not have any disciplinary disclosures (see below).

BBR Partners downsides

  • BBR Partners has a minimum account balance of $20 million, which is beyond the reach of many if not most would-be investors.
  • The firm’s fees, as a percentage of assets under management, are lower than the industry average, but with a required minimum balance of $20 million, they amount to $150,000 per year or more.
  • The firm has a tiered fee schedule, so clients with fewer assets pay higher fees than they might at a firm with a different fee structure.

BBR Partners disciplinary disclosures

BBR Partners currently lists zero disciplinary disclosures. The SEC requires RIAs to report disciplinary disclosures on Form ADV. These include any regulatory actions, criminal charges, or legal developments like liens or civil judgments that have been taken against them.

BBR Partners onboarding process

BBR Partners meets with the family members of each of its clients to learn more about their goals for their portfolio. Based on these meetings, the firm creates and executes a customized, tax-efficient investment plan, working with multiple managers on behalf of its clients. In addition, depending on the needs of the family, the firm offers advice around tax and insurance planning, family education and charitable giving.

In addition to monthly statements, clients have access to a secure website, updated daily, where they can view their entire portfolio — including assets that aren’t managed by BBR Partners — at a glance.

The bottom line: Is BBR Partners right for you?

This firm focuses exclusively on high net worth families and individuals, including those managing the transition of wealth from one generation to the next. It provides personalized investment advice to those families and oversees the investment of their assets with third-party firms. Individuals whose family net worth is less than the $20 million minimum requirement need to look elsewhere.

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.

Beth Braverman
Beth Braverman |

Beth Braverman is a writer at MagnifyMoney. You can email Beth here

Advertiser Disclosure

Investing

The Best Robo-Advisors in December 2019

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.

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 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 1.82% 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 1.82% 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 1.60% 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.

Joshua Rowe-Heupler
Joshua Rowe-Heupler |

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