business plan for robo advisor

How To Write a Business Plan for Robo-Advisor in 9 Steps: Checklist

By alex ryzhkov, resources on robo-advisor.

• Financial Model
• Business Plan
• Value Proposition
• One-Page Business Plan

Welcome to our blog post on how to write a business plan for a robo-advisor in 9 simple steps! If you're interested in joining the ever-growing industry of robo-advisory services, you've come to the right place. With the increasing demand for low-cost investment options and passive investing strategies, the robo-advisor market is booming. In fact, recent statistics show that the industry's assets under management reached a staggering $986 billion in 2020, and are projected to surpass $2.6 trillion by 2025 .

As you venture into this lucrative industry, it's crucial to have a well-thought-out business plan that not only outlines your strategy but also addresses crucial aspects such as market research, target audience, competition analysis, and financial projections. By following our 9-step checklist, you'll be able to develop a comprehensive business plan that sets you up for success .

First and foremost, conducting thorough market research is essential in understanding the current landscape of robo-advisory services. This step involves analyzing industry trends, identifying potential opportunities, and gauging the overall demand for your services.

Next, it's crucial to define your target audience and their specific needs. By understanding your potential clients' preferences, risk tolerance, and investment goals, you can tailor your services to meet their requirements .

Competition analysis is another critical step in developing your business plan. Evaluating your competitors' strengths and weaknesses can help you identify gaps in the market and position your robo-advisor as a unique and valuable offering .

Once you've completed the initial research, it's time to develop your value proposition and unique selling points. What sets your robo-advisor apart from the rest? Highlighting your competitive advantages will help attract clients and differentiate your business .

Of course, determining the right business model and revenue streams is crucial to sustaining your robo-advisory business. Whether you opt for a fee-based model or explore other innovative revenue streams, it's important to carefully consider the financial implications .

Speaking of finances, calculating financial projections and potential risks is a crucial step in any business plan. This involves estimating costs, forecasting revenue, and conducting a thorough risk analysis .

Identifying the necessary resources and potential partnerships is key to ensuring smooth operations. From technology infrastructure to regulatory requirements, outlining the resources you'll need will help you build a strong foundation for your robo-advisor business .

No business plan is complete without a well-developed marketing strategy and sales funnel. By defining your target marketing channels and outlining your customer acquisition process, you'll be able to effectively promote your services to potential clients .

Finally, outlining your operational processes and technology requirements is crucial in ensuring a seamless client experience. From onboarding to portfolio management, clearly defining these processes will help you deliver a top-notch service .

By following these 9 steps, you'll be equipped with a well-rounded business plan that addresses the key aspects of launching and running a successful robo-advisor. So why wait? Start crafting your plan today to take advantage of the booming robo-advisory industry !

Conduct Market Research

Conducting thorough market research is a critical step before starting a robo-advisor business. This step involves gathering and analyzing data to gain insights into the target market, industry trends, and customer preferences. Here are some important considerations for conducting market research:

• Identify your target market: Determine the specific group of investors you aim to serve with your robo-advisor platform. This could include millennials, high-net-worth individuals, or a particular niche market. Understanding their demographics, investment goals, and preferences will help shape your business strategy.
• Analyze market trends: Stay informed about the latest developments in the robo-advisor industry. This includes understanding regulatory changes, emerging technologies, and shifts in consumer behavior. Keep an eye on industry reports, news articles, and studies to stay ahead of the curve.
• Assess market size and potential: Determine the size of your target market and its growth potential. This information will help you assess the viability and potential scalability of your robo-advisor business. It is crucial to identify if there is enough demand for your services to support your growth objectives.
• Evaluate customer needs and pain points: Understand the pain points and challenges faced by potential customers in the investment industry. This could include high fees, lack of personalized advice, or difficulty in accessing professional investment management. Identifying these needs will allow you to tailor your services to address them effectively.

Tips for conducting market research:

• Utilize online surveys, customer interviews, and focus groups to gather valuable insights directly from potential clients.
• Study competitor offerings and their market positioning to identify gaps in the market that your robo-advisor could fill.
• Stay up to date with industry conferences, webinars, and networking events to make connections and gain industry knowledge.
• Consult with industry experts, financial advisors, and professionals who can provide valuable insights and guidance.

By conducting comprehensive market research, you'll be equipped with the necessary knowledge to develop a successful business plan for your robo-advisor platform. It will help you understand your target market, identify opportunities, and ensure that your services are aligned with customer needs.

Define Target Audience and Identify Their Needs

In order to effectively market and tailor your robo-advisor services, it is crucial to clearly define your target audience and identify their specific needs. This step will lay the foundation for developing a successful business plan.

Start by conducting thorough market research to understand the demographics, behaviors, and preferences of potential clients. This will allow you to gain insights on their financial goals, investment preferences, and risk tolerance. Analyze data on age, income level, investment experience, and other relevant factors to pinpoint your target audience.

Once you have defined your target audience, it is important to understand their needs and pain points. Identify what challenges they face when it comes to managing their investments and financial goals . Are they looking for convenient and affordable investment options? Are they seeking a personalized and user-friendly platform? Do they prioritize access to a wide range of investment options?

Understanding your target audience's needs will enable you to develop targeted marketing messages and create a product that resonates with them . By addressing their pain points and offering solutions, you will position your robo-advisor as a valuable tool that can meet their investment needs.

To further refine your target audience, segment them based on specific criteria. For example, you may have different offerings for younger investors compared to retirees. Tailor your marketing strategies and communication channels to effectively reach each segment, ensuring your message is relevant and appealing.

By dedicating time and effort to defining your target audience and understanding their needs, you will be able to develop a robo-advisor business plan that is tailored to your clients' preferences, ultimately increasing your chances of success in the competitive financial services industry.

Analyze Competitors And Evaluate Their Strengths And Weaknesses

When starting a robo-advisor business, it is essential to analyze competitors in the market and evaluate their strengths and weaknesses. This analysis will not only help you understand the competitive landscape but also identify areas where you can differentiate and provide unique value to your target audience.

First, identify your main competitors in the robo-advisor industry. Look for established players who have already gained market share and have a similar target audience. Take note of their offerings, pricing models, and marketing strategies.

• Consider the strengths of your competitors. Identify what they do well and how they differentiate themselves from others in the market. This could include factors like a user-friendly interface, a wide range of investment options, or personalized investment recommendations.
• Highlighting these strengths will help you understand what customers value in a robo-advisor and give you insights into areas where you can improve or provide a unique selling proposition.

Weaknesses:

• Next, evaluate the weaknesses of your competitors. Are there any gaps in their service offerings or areas where they falter? This could be high fees, a lack of transparency, or limited customer support.
• By identifying these weaknesses, you can position yourself to provide a solution or alternative that addresses customers' pain points and stands out in the market.

Tips for analyzing competitors:

• Conduct a thorough analysis of their website, social media presence, and customer reviews to gather valuable insights.
• Take note of any unique features or value-added services they offer to their clients.
• Consider reaching out to their current or past clients for feedback and understanding of their experience.
• Keep an eye on their marketing campaigns and strategies to understand how they attract and retain customers.

Remember, analyzing competitors is not about copying their strategies but rather understanding the market landscape and finding opportunities for differentiation. By carefully evaluating their strengths and weaknesses, you can shape your robo-advisor business to meet the needs of your target audience in a unique and compelling way.

Develop A Value Proposition And Unique Selling Points

Developing a strong value proposition and defining unique selling points is crucial for a successful robo-advisor business. These elements will differentiate your business from competitors and attract potential clients. Here are some key steps to consider:

• Understand client needs: Conduct thorough market research and gather insights about your target audience. Identify their pain points, financial goals, and preferences. This understanding will help you tailor your value proposition to meet their specific needs.
• Highlight benefits: Clearly communicate the benefits clients can expect from your robo-advisor service. This can include features such as cost-effectiveness, convenience, personalized advice, access to diverse investment options, and transparent reporting.
• Emphasize expertise: Showcase your team's expertise and qualifications in the financial industry. Highlight your experience, track record, and any certifications or accolades you have obtained. This will instill trust and confidence in potential clients.
• Offer customization: Differentiate your robo-advisor by offering customized investment portfolios based on clients' risk tolerance, objectives, and time horizon. Highlight your ability to provide personalized investment strategies that align with each individual's financial goals.
• Provide exceptional customer service: Stand out from the competition by emphasizing your commitment to excellent customer service. Offer multiple channels of communication, quick response times, and personalized support. This will foster strong client relationships and loyalty.

Tips for Developing a Compelling Value Proposition:

• Identify your unique selling points by conducting a thorough analysis of your competitors.
• Focus on what sets your robo-advisor apart and how it can address specific pain points in the market.
• Keep your value proposition concise, clear, and easy to understand.
• Use compelling language that resonates with your target audience.
• Continuously monitor the market and adapt your value proposition to remain relevant and competitive.

By developing a compelling value proposition and highlighting your unique selling points, you will attract the attention of potential clients and position your robo-advisor business as a strong player in the market.

Determine The Business Model And Revenue Streams

When establishing a robo-advisor business, it's crucial to determine the right business model and revenue streams. This will lay the foundation for your financial success and sustainability. Your chosen business model will define how you generate revenue and provide value to your clients.

1. Choose the right business model: Select a business model that aligns with your goals, target audience, and the services you plan to offer. The fee-based model, mentioned earlier, is a popular choice for robo-advisors. However, you may also consider a subscription model, where clients pay a fixed amount for access to your services, or a hybrid model that combines both.

2. Determine your revenue streams: Identify the various ways you can generate revenue within your chosen business model. For a fee-based model, your revenue will primarily come from charging a percentage of the assets under management. However, you can also explore additional revenue streams, such as offering premium services or partnerships with financial institutions.

Tips for determining your business model and revenue streams:

• Consider the preferences and financial capabilities of your target audience when choosing a business model.
• Research successful robo-advisors in the market to explore different revenue streams and learn from their strategies.
• Stay flexible and open to adjustments as you gain insights from market feedback and client needs.
• Ensure your revenue streams are aligned with your value proposition and the unique benefits you provide to your clients.

By carefully determining your business model and revenue streams, you will build a robust foundation for your robo-advisor business. This will not only ensure your financial success but also enable you to deliver valuable services to your target audience efficiently and effectively.

Calculate Financial Projections And Potential Risks

One of the crucial steps in writing a business plan for a robo-advisor is to calculate financial projections and assess potential risks. This process allows you to estimate your future earnings and identify possible challenges that may arise along the way. Here are the key aspects to consider:

• Revenue Projections: Begin by estimating your potential revenue streams and forecasting the growth of your client base. Consider factors such as the current market size, potential market share, and the scalability of your business model. Clearly outline the assumptions you have made to arrive at your revenue projections.
• Cost Projections: Identify your fixed and variable costs, including marketing expenses, employee salaries, technology maintenance, and regulatory compliance costs. Ensure that your cost projections align with your revenue projections and allow for sufficient profitability.
• Break-Even Analysis: Determine the point at which your robo-advisor business will start generating enough revenue to cover its costs. This analysis helps you understand the timeframe required to reach profitability and allows for strategic planning.
• Risk Assessment: Assess potential risks that could impact your business, such as regulatory changes, market volatility, or cybersecurity threats. Develop strategies to mitigate these risks and outline contingency plans to address unforeseen challenges.

Tip #1: Seek Expert Advice

• Consider consulting with financial professionals, such as accountants or financial advisors, to ensure the accuracy and credibility of your financial projections.

Tip #2: Regularly Review and Update

• Financial projections are not set in stone and should be reviewed and updated regularly to reflect changing market conditions, business growth, and new opportunities.

By carefully calculating your financial projections and evaluating potential risks, you can strengthen the foundation of your robo-advisor business plan. This step enables you to make informed strategic decisions, attract potential investors, and navigate the dynamic landscape of the financial industry.

Identify Necessary Resources and Partnerships

Before launching a robo-advisor business, it is crucial to identify the necessary resources and partnerships that will drive its success. This step involves taking stock of the essential elements required to operate the business efficiently and effectively.

First and foremost, a reliable and secure technology infrastructure is a foundational resource for any robo-advisor. This includes a robust platform capable of handling client onboarding, investment monitoring, and rebalancing, as well as providing a user-friendly interface for clients to access their accounts. It is essential to assess the scalability and flexibility of the chosen technology to accommodate the growth and evolving needs of the business.

Additionally, access to accurate data and investment research is of utmost importance. This can be achieved through partnerships with reputable financial data providers and research firms. These partnerships can provide the necessary market intelligence and insights to develop and optimize investment strategies.

• A well-equipped and skilled team is also critical. This includes individuals with expertise in finance, compliance, and technology. Hiring professionals with a deep understanding of the regulatory landscape is crucial to ensure compliance with industry standards.
• Consider partnering with custodians and brokerage firms to facilitate the safekeeping and trading of client assets. These partnerships can provide the necessary infrastructure to hold client investments securely.
• Furthermore, maintaining relationships with legal professionals and compliance consultants can help navigate the complex regulatory environment and ensure adherence to applicable laws and regulations.
• Conduct thorough due diligence when selecting technology partners and data providers. Evaluate their track record, reliability, and scalability to ensure they can meet your business requirements.
• Establish clear communication channels and expectations with your partners. Regularly review and assess their performance to ensure alignment with your business goals.
• Seek expert guidance in legal and compliance matters to avoid regulatory pitfalls and maintain the integrity of your robo-advisor business.

By identifying the necessary resources and establishing strategic partnerships, you can position your robo-advisor business for success in an increasingly competitive marketplace. These essential elements will support the delivery of exceptional service, ensuring that your clients' needs are met consistently.

Create A Marketing Strategy And Sales Funnel

Creating a strong marketing strategy is essential for the success of your robo-advisor business. It helps you reach your target audience effectively and generate leads that can be converted into clients. A well-designed sales funnel complements your marketing efforts by guiding potential clients through the buying process.

1. Define your target audience: Before you can create an effective marketing strategy, you need to clearly define your target audience. Understand their demographics, financial goals, and investment preferences. This will help you tailor your marketing messages and campaigns to resonate with them.

2. Develop a compelling value proposition: Your value proposition should highlight the unique benefits and advantages that your robo-advisor offers. Differentiate yourself from competitors and clearly communicate why potential clients should choose your service.

3. Choose the right marketing channels: Identify the most effective marketing channels to reach your target audience. This may include digital advertising, content marketing, social media, email marketing, or strategic partnerships. Focus on channels that provide the highest return on investment for your business.

4. Craft persuasive marketing messages: Develop compelling and persuasive messages that communicate the value of your robo-advisor. Clearly articulate how your service can address the specific needs and pain points of your target audience. Use persuasive language and highlight the unique features of your offering.

5. Build a sales funnel: A sales funnel is a systematic approach to guide potential clients through the buying process. It typically includes stages such as awareness, interest, consideration, and conversion. Use various marketing tactics and tools to nurture leads and move them closer to becoming paying clients.

Tips for creating an effective marketing strategy and sales funnel:

• Use data analytics to monitor and optimize the performance of your marketing campaigns.
• Personalize your marketing messages to make them more relevant and engaging for your target audience.
• Utilize marketing automation tools to streamline and automate your marketing processes.
• Consistently evaluate and refine your marketing strategy based on the feedback and results you receive.

By creating a comprehensive marketing strategy and well-designed sales funnel, you can effectively promote your robo-advisor business and attract a steady stream of clients. Remember to regularly review and adapt your strategy to stay ahead in the dynamic financial services industry.

Outline Operational Processes And Technology Requirements

When it comes to running a successful robo-advisor business, having efficient operational processes and the right technology infrastructure are critical. Here are some key considerations for outlining your operational processes and technology requirements:

1. Client Onboarding: Develop an automated process for onboarding new clients. This should include gathering necessary client information, conducting risk assessments, and providing a seamless account setup process.

2. Portfolio Construction: Define the criteria and algorithms that will be used to construct client portfolios. This may involve determining asset allocation strategies, rebalancing criteria, and considering any investment restrictions or preferences.

3. Trade Execution: Consider how trades will be executed and how often rebalancing will occur. Evaluate whether you will partner with a brokerage firm or utilize an in-house trading platform.

4. Reporting and Communication: Determine how you will provide regular updates and performance reports to clients. This may involve offering online dashboards, personalized notifications, and periodic communication from the advisory team.

5. Compliance and Security: Ensure that your operations adhere to industry regulations and data security standards. Implement robust compliance monitoring processes and prioritize the protection of client data.

6. Scalability and Growth: Consider the scalability of your operational processes and technology infrastructure as your robo-advisor business grows. Assess whether your systems can handle increasing client volumes without compromising efficiency and quality.

• Regularly review and update your operational processes to adapt to changing market conditions and regulatory requirements.
• Invest in reliable and secure technology platforms that can support the growth and complexity of your business.
• Consider partnering with technology providers or outsourcing certain operational tasks to streamline your processes and enhance efficiency.
• Train your team on the proper utilization of technology tools and systems to maximize productivity and minimize errors.

By outlining your operational processes and technology requirements early on, you can ensure that your robo-advisor business runs smoothly and efficiently, providing a seamless experience for your clients. Investing in the right technology infrastructure and focusing on operational excellence will enable you to deliver outstanding financial services while differentiating yourself in the competitive robo-advisor market.

In conclusion, writing a business plan for a robo-advisor requires careful consideration of various factors and steps. By conducting market research, defining the target audience, analyzing competitors, and developing a value proposition, you can create a strong foundation for your business. Additionally, determining the business model, calculating financial projections, and identifying necessary resources and partnerships will help ensure your robo-advisor venture's success.

Creating a marketing strategy, outlining operational processes, and understanding the technology requirements are key elements in attracting and retaining clients. Ultimately, with a well-executed business plan, you can position your robo-advisor as a reliable and cost-effective option for investors looking for passive investment management and financial advice.

• Conduct market research
• Define target audience and identify their needs
• Analyze competitors and evaluate their strengths and weaknesses
• Develop a value proposition and unique selling points
• Determine the business model and revenue streams
• Calculate financial projections and potential risks
• Identify necessary resources and partnerships
• Create a marketing strategy and sales funnel
• Outline operational processes and technology requirements

By following this checklist and tailoring it to your specific robo-advisor, you can establish a solid foundation for your business and attract investors seeking a low-cost, passive investment option.

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The Best Robo-Advisors of 2023

Understand the ins and outs of digital advice and see our top picks.

Digital investment advice is booming. As access to these services has increased, so have investors' questions about their suitability , cost , and range of offerings.

Digital investing platforms, or robo-advisors, offer financial advice and limited human interaction. This combination of services is becoming increasingly appealing, thanks to Generation Z 's ability and preference to handle its finances online, the pandemic-driven shift to virtual interactions with advisors , and increasing interest in novel assets like cryptocurrency.

In a report with my colleagues Alec Lucas, Dan Culloton, David Kathman, Drew Carter, Elizabeth Templeton, Gabriel Denis, and Lan Anh Tran, we took a closer look at what the top robo-advisors can (and can't) do and the type of investors who could benefit from using one. And if robo-advisors sound like a good fit, consider our list of top providers to better understand the options that could work for you.

You can also dive deeper into the details in the full research report .

IN THIS ARTICLE

What is a robo-advisor, are robo-advisors worth it for you, the drawbacks of robo-investing, who are the best robo-advisors, robo-advisor assessments, how we analyzed robo-advisors.

Robo-advisors occupy a middle ground between a wealth manager and a do-it-yourself trading platform.

For example, robo-advisors use computer algorithms to provide low-cost asset allocation and build automated investor portfolios. They offer more specificity than the straightforward trade execution of a brokerage platform but not as much as the personalization you'd get from a living, breathing wealth manager.

Robo-advisors also offer financial goal planning at a basic level. That means more customization than you'd see from a brokerage platform but not as much as from a live financial advisor.

This semitailored approach can be a good fit for early- to midcareer investors who want to further their investment strategy but don't have the means, need, or interest to engage a traditional financial advisor.

This group of investors would benefit from robo-advisors that offer :

• Lower fees . Perhaps the greatest appeal of robo-advisors is their substantially lower price tag for advice. Of the 20 providers we reviewed, the median advisory fee was 0.25%. Financial advisors tend to have advisory fees around 4 times that amount—about 1%—which is a greater burden on individuals investing less money.
• Lower account minimums.  These substantially reduce barriers of entry to investing. Five of the 20 robo-advisor platforms we reviewed have no account minimum (or close to zero) for their most basic services, and nearly every other provider has a minimum of $5,000 or less. On the other hand, research from Cerulli Associates shows that only 7% of financial advisors focus on serving individuals who invest less than $100,000.
• Strategies to minimize taxes. Several robo-advisors we reviewed include the option to sell underperforming investments at a loss to offset taxes owed from other, higher-performing securities. This sophisticated strategy, known as tax-loss harvesting , speaks to the breadth of services and tax efficiency that these providers can offer at a lower price point.

If you’re still learning the basics about investing and are intimidated by making decisions independently (and looking to invest a good amount), it might be smart to work with a human advisor who can take the lead and guide you through the ins and outs of their decision-making.

Investors with larger, more complex portfolios could also benefit from the support of a traditional financial advisor. That’s especially true for complex matters like insurance and risk management , estate planning , and retirement drawdown strategies .

Other factors could also complicate a portfolio. For instance, if you have a family member with a disability , you could likely benefit from one-on-one guidance around a special-needs trust or ABLE account.

Our assessment focused on the factors that most directly help investors reach their financial goals: fees, quality of portfolio construction and investment advice, and financial planning tools.

Read on to see our take on the leading robo-advisors.

These are condensed versions of our assessments; you can explore the complete evaluations in our 2023 Robo-Advisor Landscape report . (We didn't evaluate Ellevest or J.P. Morgan Automated Investing because of potential conflicts of interest.)

Vanguard Digital Advisor

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: Starting at 0.30%. Data as of March 31, 2023.

Vanguard Digital Advisor and its hybrid sibling Vanguard Personal Advisor Services, which combines automation with human expertise, once again earn the top spot among the robo-advisors we surveyed. In fact, Vanguard has extended its lead through multiple enhancements.

In recent years, Vanguard has introduced environmental, social, and governance options, active equity and fixed-income funds, and a municipal-bond strategy. Tax-loss harvesting is now available to all advice clients, who also benefit from tax-efficient implementation, including a completion methodology that helps investors avoid realizing capital gains on existing holdings.

Vanguard's portfolio construction approach combines relative simplicity with customization. It offers more than 300 glide paths, based on an investor's needs, and updates the path annually as model inputs change.

Vanguard also offers an impressive array of planning tools, including outside account aggregation, custom goal planning, debt planning, a rainy-day tool, a healthcare estimator, and Medicare match. Clients with at least $50,000 can opt for the hybrid Personal Advisor Services offering for a 0.30% annual advisory fee (not including underlying fund fees) and have unlimited access to a pool of certified financial planners, who can further customize their portfolios around non-Vanguard fund holdings and individual stock ownership. Clients with higher asset levels are eligible for additional, more-customized planning services.

Vanguard isn't flawless. Some clients have complained about customer-service issues, and its "Invest for Amex by Vanguard" partnership has a higher pricing structure, which runs counter to Vanguard's generally rock-solid commitment to keeping pricing low and avoiding layered fees. This relatively minor issue aside, Vanguard continues to set the standard for low-cost digital financial advice.

Fidelity Go

Fee assumes a $15,000 account balance.

Investors are automatically opted in to a 0.35% asset-based fee as soon as assets reach $25,000. Data as of May 31, 2023.

Fidelity Go stands out for its simple, straightforward approach that draws on Fidelity's strong global research and asset-allocation team.

Fidelity uses information from a relatively thorough risk-tolerance questionnaire to map investors to a taxable or retirement-focused portfolio, and each portfolio includes seven different risk levels. The portfolios all focus on a short list of core asset classes; esoteric asset classes or ESG-focused strategies aren't part of the offer.

The service also offers ongoing support. Text alerts and other communications let customers know how they are progressing with their goals, as well as provide behavioral nudges to encourage long-term investing. Fidelity Go does not currently offer tax-loss harvesting.

All Fidelity Go participants have access to tools for spending and debt management, while those with balances above $25,000 also get unlimited advice and planning calls. Users can choose from a menu of coaching solutions focused on different topics, including retirement planning and budgeting. In contrast to Betterment and Schwab, not all its financial advisors hold the CFP designation, though most do.

Schwab Intelligent Portfolios

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: $300 one-time planning fee plus ongoing fees of $30 per month . Data as of May 31, 2023.

Schwab's robo-advisor program narrowly misses greatness.

The portfolio-construction process has several strengths. It uses an extensive risk-tolerance questionnaire to match investors with portfolios designed for one of 12 risk levels. Plus, the portfolios provide comprehensive asset-class exposure, including both U.S. and international large- and small-cap stocks, gold, Treasury Inflation-Protected Securities, REITs, corporate bonds, mortgages, Treasuries, high-yield bonds, muni bonds, world bonds, and emerging-markets debt. And the underlying investments are solid, while Schwab's approach to constructing portfolios, rebalancing to limit risk, and managing tax considerations is thoughtful.

Despite the portfolios' strengths, excessive cash allocations are an Achilles' heel. Cash allocations range from 6% to 30% of assets depending on the portfolio's risk level. This cash buffer was a positive in 2022's bear market, but has led to lower returns over longer periods .

Even with cash yields having reached above 5% as of early June 2023, above-average cash allocations will likely lead to lower returns over time.

Schwab Intelligent Portfolios Premium suffers from the same cash issue but otherwise has considerable merit. Investors with at least $25,000 have unlimited access to a financial planner holding the CFP designation. The service offers comprehensive financial planning, including advice on mortgages, college savings, retirement savings, retirement income, and budgeting.

Even with this flaw, Schwab still ranks among the best robo-advisoroptions, especially for investors with enough assets to benefit from itscomprehensive advice on financial planning and retirement income .

Betterment charges $4/month for accounts less than $20,000. However, that fee converts to 0.25% a number of ways, including with a $250/month automated deposit into a Betterment account at any balance. Advisory Fee for Premium Customers: 0.40%.

Data as of May 31, 2023.

Betterment's array of services and value set it apart, but investors would be better served sticking to its core offering and avoiding its gimmicky extras like cryptocurrency.

Betterment is one of the few robo-providers that employs a glide path, which gradually adjusts the portfolio's asset mix to become more conservative over time. Portfolio construction is sensible and well-thought-out: The main Core Portfolios series offers a mix of low-cost ETFs with exposure to several major asset classes. Betterment also offers a range of other portfolios beyond its core offering.

Betterment has a wide range of services, especially given its below-average price tag. Advice is part of the offer, too, and investors who use multiple banking and investment accounts can get holistic help with retirement investing, goal planning, and prioritizing various accounts. Although on-demand access to an investment advisor is reserved for Betterment Premium, clients can also pay hourly for advice on specific situations, such as retirement planning, general financial advice, college savings, marriage planning, and other topics.

Investors should be aware Betterment was fined $9 million in April 2023 after the SEC found the firm had not disclosed tax-loss-harvesting program changes and coding errors that cost about 25,000 clients a combined $4 million from 2016-19. A long-running error in a robo's algorithms is concerning, as is the lack of disclosure here.

Still, Betterment offers robust core investment and financial planning options at reasonable costs, and its website gives investors plenty to read before they invest. It's a strong competitor, especially for investors looking for a clean, easy-to-use interface.

Wealthfront

Fee assumes a $15,000 account balance. Data as of May 31, 2023.

Wealthfront has many strengths, but some strategic shifts and questionable allocations hold it back.

One strength is its low cost. The quality of the underlying funds is also generally strong; the majority of funds used in Wealthfront's portfolios receive Morningstar Medalist Ratings of Gold or Silver. The service includes a thorough questionnaire that incorporates behavioral economics research to evaluate both risk tolerance and risk capacity.

Wealthfront also has taken a thoughtful approach to tax-loss harvesting by incorporating direct indexing, which enables it to harvest losses at the individual stock level. It embraces a "play to learn" philosophy that allows investors to buy and sell individual stocks but still encourages them to build diversified portfolios.

Wealthfront slots investors into a portfolio matching one of 20 risk levels and spanning three account types: taxable, retirement, and socially responsible investing. Customers also have access to financial planning tools for spending, savings, income growth, inflation, Social Security, taxes, college planning, and home equity.

Still, some of Wealthfront's strategies seem driven by popular but not necessarily prudent investment trends. Many of its portfolios are on the aggressive side, and Wealthfront allows investors to put up to 10% of their assets in cryptocurrency funds.

Wealthfront had previously agreed to be acquired by Swiss banking giant UBS, but the two firms have now mutually agreed to terminate their merger agreement.

SigFig is a lean offering that doesn't sport the same scale of resources as some of its competitors, but it checks most of the right boxes for a robo-advisor.

SigFig's management fee is reasonable, and the program is free for accounts with less than $10,000. It uses a suite of low-cost ETFs for its portfolios but does not waive or return fees on these holdings.

SigFig's portfolio construction approach is simple but sensible. Allocations are strategic and updated periodically depending on the market environment and SigFig's capital markets assumptions. They are generally reasonable, with equity allocations for taxable portfolios ranging from 26% to 90% of assets, depending on the risk level, and 13% to 85% for retirement portfolios. However, all tax-deferred portfolios include allocations to riskier asset classes, such as emerging-markets debt and REITs. In addition, the portfolios only rely on one broad index for U.S. stock exposure.

The service has some weaknesses. It doesn't provide advice for multiple investment goals and lacks more-dedicated educational resources that could help clients make SigFig their "one-stop shop." The privately held firm's focus on partnering with larger corporations like UBS and Wells Fargo raises questions about whether it will remain independent. SigFig's small size and limited revenue base could make it a more likely acquisition target than some of its peers.

U.S. Bancorp Automated Investor

U.S. Bancorp Automated Investor is a straightforward offering that delivers on its simple promises .

Client portfolios are sorted into varying allocations of global equity and U.S. fixed-income ETFs according to goals and risk level, which is adequately granular.

Well-constructed portfolios stand out as the service's strong point. The service automatically applies glide paths for clients with a retirement or major purchase goal, a useful yet rare feature among most providers. This scales down the portfolio’s equity exposure as the end date approaches to limit risk and maximize capital preservation.

The portfolios' underlying funds consist of low-cost, third-party ETFs tracking sensible indexes, which provide access to a standard range of asset classes. Nontaxable and tax-efficient portfolios are well-diversified, and U.S. Bancorp does not put clients' assets in any gimmicky products or niche market areas.

U.S. Bancorp also provides automatic rebalancing and tax-loss harvesting. However, the service lacks some other core features such as retirement withdrawal advice or outside account aggregation that prevent it from being a one-stop shop for clients.

The service is currently only available to existing U.S. Bank customers, though the firm does plan to open the platform to nonbank customers in the near future.

SoFi Wealth

While SoFi's access to financial planning and low cost of entry are attractive, the service has some questionable features that damp its appeal.

SoFi includes five different equity/fixed-income allocations according to a client's risk tolerance, but the firm's two proprietary ETFs are still used as the main equity exposure. SoFi has recently been waiving the annual fees for these ETFs, but if those waivers expire, their expense ratios would no longer be in line with SoFi's low-cost claims. In addition, these ETFs have an inherent growth bias that might not be suitable for a core equity allocation.

Originally a student loan refinancing service, SoFi has expanded into personal loans, mortgages, banking services, and insurance. As a result, the company's strategy for personal finance products seems focused on monetization through cross-selling as much as serving investment needs.

SoFi clients can access financial advisors by phone, virtual meetings, and electronic messages at no extra charge. SoFi also provides an online library of articles on a broad range of topics including goals, saving, investing, budgeting, debt repayment, home buying, and insurance. However, these articles also seem to double as marketing for its various personal finance services.

With no investment minimum and a straightforward investment approach, Acorns is easily accessible for beginning investors. But it doesn't quite live up to the hype.

It stands out for its focus on micro savings, with features that help investors round up spending on everyday purchases to build an investment balance. It also offers an "Earn Program" that provides rebates on purchases made through select companies. However, its subscription-based pricing model is relatively pricey given its target audience.

Acorns offers a small number of portfolios corresponding to different risk levels (five core portfolios and four SRI portfolios). Asset allocation is straightforward, and the quality of the underlying investments (mainly from iShares, Vanguard, J.P. Morgan, and Goldman Sachs) is above average. However, investors can now opt into a bitcoin ETF with up to 5% of portfolio assets or directly invest in stocks with up to 50% of their assets.

Acorns is also lacking in features. It offers automatic rebalancing but no tax-loss harvesting and few if any planning-related features. Some of the features it does have are suboptimal. For example, customers can set up an emergency fund, but it's a non-interest-bearing demand deposit. With other cash options now yielding 5% or more, this option is less appealing for cash savings .

Wells Fargo Intuitive Investor

Wells Fargo Intuitive Investor is a middle-of-the-road offering that has seen some improvements over the past year.

While not as robust as some competitors, it's not a bad choice for existing Wells Fargo clients. The program's asset-based fee is relatively high, though they've lowered the investment minimum considerably.

Wells Fargo uses the proprietary portfolio management algorithm from SigFig for ongoing monitoring, rebalancing, and tax-loss harvesting. Investors can choose from Wells Fargo's nine investment portfolios based on their answers to a risk-tolerance questionnaire.

The portfolios are intended to be well-diversified, cost-effective, and supportive of a long-term investment philosophy that shies away from niche products. Portfolio allocations are reasonable, with minimal cash allocations and adequate exposure to major asset classes.

Access to a financial advisor and tax-loss harvesting is a clear advantage. Goal-oriented resources are intended to help investors stay on track, and the platform has made some efforts to offer educational content for beginning investors, but it doesn't offer anything more extensive such as investment calculators or methodology whitepapers.

Ally Invest

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: Between 0.75% and 0.85%. Data as of May 31, 2023.

Ally Invest still has some attractive features for Ally Financial banking customers, but it has otherwise lost ground to rivals owing to a lack of new features.

Ally's experienced investment team has put together 32 portfolios that rely on inexpensive Vanguard and iShares ETFs and come in two basic types: Market Focused (2% cash allocation), which has an annual advisory fee, and Cash Enhanced (30% cash allocation), which has no advisory fee. Each type has a core, tax-optimized, and ESG version. Allocations within each version vary based on one's risk profile.

In May 2022, Ally launched a wealth management service. It includes access to a dedicated human advisor alongside the digital advisor for a tiered fee: 0.85% for a household's first $250,000 in assets, 0.80% for its next $750,000, and 0.75% for assets exceeding $1 million. Those fees, however, are steep compared with the premium offers of best-in-class rivals Betterment, Fidelity, and Vanguard.

Ally has a few other weaknesses to address. Tax-loss harvesting isn't yet an option, and investors can't aggregate outside accounts or plan for multiple goals. Investors are also defaulted into the Cash Enhanced portfolios, whose 30% cash allocation may earn a competitive rate relative to other high-yield savings accounts but will struggle to keep up with inflation.

Merrill Guided Investing

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: Between 0.70% and 0.85%. Data as of May 31, 2023.

Merrill Guided Investing and its premium cousin Merrill Guided Investing with Advisor lack feature advantages that justify their higher price tags relative to more comprehensive robo-advisor offerings.

Portfolio construction is fairly standard, but there are a few sticking points. The firm offers five levels of risk tolerance, with tax-aware and taxable options as well as an ESG suite for each of these risk levels. However, the firm's risk-tolerance questionnaire is less detailed than most. Merrill tilts its portfolios—composed almost exclusively of low-cost ETFs—toward certain asset classes, such as value stocks, and away from others based on firmwide capital market assumptions. These active asset-class decisions add uncertainty as they could help or hurt in any given year.

Merrill Guided Investing with Advisor offers the additional option of investing in hybrid active/passive portfolios of the three options listed above that supplement certain asset-class exposures with actively managed funds. However, it is difficult to recommend the active options used as Merrill no longer allows nonclients to access these composite portfolios.

What sinks this offering is its dearth of additional features, especially when considering its high fee and its lack of integration with Bank of America's more extensive, and impressive, research and educational offerings on its brokerage platform. Features like tax-loss harvesting or integration of external accounts, which differentiate more compelling offerings, are not present here. Merrill Guided Investing with Advisor, too, is somewhat misleading, as it provides access only to Series 6 and Series 7 certified "financial consultants" rather than CFP-certified advisors; clients who want access to those must unenroll from this program and reenroll in one of Merrill's managed account or advisory relationship offerings.

Empower Wealth/Personal Capital Investing

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: Between 0.49% and 0.89%. Data as of May 31, 2023.

Formerly the financial technology upstart Personal Capital, Empower Personal Wealth is now ensconced in a North American insurance and asset-management conglomerate. Though it arguably helped create the category, Empower now does not consider itself a robo-advisor but rather a comprehensive wealth manager that uses digital tools to reach and serve the mass affluent. The digital component of its services, however, makes it a hybrid offering that falls within the scope of this report.

Empower opted out of our robo-advisor survey, which limits the information available to what can be gleaned from public disclosures. It is hard to gauge the relative attractiveness of Empower Personal Wealth's offering without its survey results or an interview. Based on publicly available information, however, it offers a comprehensive range of services, albeit for a steep fee.

Those with less than $250,000 in assets can expect more-basic options—essentially ETF portfolios based on client goals and risk tolerance. Those with $250,000 to $1 million get more comprehensive advice, including a dedicated certified financial planner and customized portfolios that include individual securities. At higher levels of assets, the firm layers in private banking and estate planning. Individuals and families with more than $5 million can invest in private equity.

Marcus Invest

Lowering fees was a plus, but transparency is lacking, and Goldman Sachs' retreat from its Marcus consumer platform in early 2023 leaves this offering well behind its competitors.

Clients can choose from three investment styles: core, ESG, and smart beta. Each style has the same asset-class allocations but uses different ETFs to populate the portfolios. Established Goldman Sachs teams design and execute the portfolios, which are based on investors' stated time horizons and risk tolerances. Once investors receive a recommended portfolio, they have the option to go with that portfolio or seek out a new recommendation.

Marcus Invest lacks features like financial planning advice and tax-loss harvesting that come with top robo-advisors, but poor portfolio transparency and the offering's viability are larger concerns. Goldman doesn't share allocation information with nonclients, which leaves would-be investors in the dark on issues such as how much may be allocated to emerging markets in different portfolios. Further, when Goldman splintered its consumer business in October 2022, it announced a strategic pivot away from its Marcus platform. In February 2023, the firm said it would sell off part of its personal-loan book. Robo-advice appears safe for now, but the retreat from a consumer-focused business raises some uncertainty for investors here.

Citi Wealth Builder

Citi Wealth Builder's limited range of planning-related services and the uncertainty owing to a recent change in leadership make it a less competitive player in the robo-advisor space.

Portfolio construction at Citi does not reflect the same level of consideration as competing offerings. The digital platform offers three categories of portfolios, including index-tracking portfolios,

sustainability-focused portfolios, and actively managed portfolios. Specific risk profiles are not disclosed, but clients are placed into one of five portfolios based on their investment preferences. The portfolios invest in stocks, bonds, and short-term investments, and clients must have a Citibank checking account to open an account. Citi does not provide further insight into its asset-allocation process or underlying funds, leading to a basic service that lacks transparency.

On the positive side, fees for this service are comparatively low and have come down recently. However, the fee waiver on the underlying strategies was removed, which could increase the offering's overall cost.

Clients can contact a financial coach at any point, but the service does not advertise financial planning capabilities and seems more service- than advice-oriented. Additionally, tax-loss harvesting is not available. Like other robo-advisors offered by banks, this service appears to be a small part of the wealth management universe and potentially a way to get clients in the door for other services.

E-Trade Core Portfolios

E-Trade Core Portfolios meets industry standards in some respects, but it lacks transparency.

The service's advisory fee is in line with most competitors', but it does not include the underlying ETFs' expense ratios. Because the firm doesn't divulge which ones it uses or their relative weightings, it is impossible to calculate total costs.

This lack of transparency also makes it difficult to ascertain the effectiveness of the firm's portfolio-construction methodology. Though E-Trade now relies on Morgan Stanley's considerable macro research capabilities for capital market assumptions on key asset classes, the investment team that builds the firm's portfolios hasn't changed. Though the firm states it employs mostly cheap, beta-focused ETFs from third-party providers, it's hard for potential investors to verify the claim without a full list of holdings.

The portfolio assignment process is also a mixed bag. After going through a short risk questionnaire, E-Trade assigns clients to one of six target risk portfolios, ranging from aggressive to conservative. It does not consider risk capacity or adjust client portfolios based on time horizon or investing goals.

E-Trade plans to add features, such as tax-loss harvesting, but the service still lacks other compelling features such as integrated goal-planning across a variety of internal and external accounts and a way to seek more comprehensive counsel from financial advisors

UBS Advice Advantage

UBS has been busy lately, but the Advice Advantage program remains an afterthought.

UBS' March 2023 acquisition of Credit Suisse poses a potential disruption to its global wealth management services, including this offering. A change in leadership at the top creates additional uncertainty, as UBS' new CEO has a different approach to the future of wealth management than his predecessor. And a failed acquisition of competing robo-advisor Wealthfront over the past year raises questions about how Advice Advantage fits into the larger UBS organization.

On top of this, hefty costs, steep account minimums, and poor transparency continue to be significant negatives for UBS Advice Advantage. The program's annual fee places this offering among the priciest robo-advisors we evaluated. Those fees are in addition to the expense ratios for the underlying funds used in the program, which are difficult to determine because UBS does not disclose which funds are used in the portfolios.

UBS Advice Advantage leverages SigFig's algorithm and offers investment advice, custody, trading/execution, and performance reporting. Investors can choose from five different portfolio risk levels based on a standard risk-tolerance questionnaire. Unfortunately, UBS does not publicly disclose which asset classes and underlying funds are used in the program.

On the positive side, UBS Advice Advantage includes access to financial advisors as well as portfolio diagnostics that incorporate outside holdings. However, it seems to play a secondary role within UBS' larger universe. With a disappointing amount of public information available, little credit can be given to this offering.

Fee assumes a $15,000 account balance and a blended account with active and passive investments. Data as of May 31, 2023.

Despite making several improvements, Titan remains the least attractive robo-advisor among those we evaluated because of its aggressive investment platform, narrow focus, and unproven management.

Though Titan has evolved its fee system for the better, its charges remain above average, and the underlying fees of some of the strategies in its client portfolios are very high. Titan styles itself as a lower-cost wealth manager for younger, tech-savvy up-and-coming investors who still cannot afford a private banker, but it is far from a low-cost option.

Increased diversification is laudable, but problematic inclusions in client portfolios remain. Available closed-end funds invest in esoteric asset classes, such as private credit and venture capital, that most investors do not need and would not miss. Titan's in-house strategies have mixed records, at best, and are concentrated and risky.

Titan plans to continue to develop its services, but it is not a holistic financial planner. It does not provide tax advice or manage its portfolios with regard for tax consequences, which means rebalancing portfolio allocations among its volatile equity and crypto strategies can result in big tax bills for clients investing in taxable accounts.

Titan uses client information to place them in aggressive, moderate, or conservative portfolios, distinguished by the percentage of assets each hedges. Titan uses technical signals to differentiate a hedge-worthy downturn from normal volatility, a notorious challenge even for investors who are not also trying to build and run a digital wealth management platform.

Fee assumes a $15,000 account balance and a Plus subscription plan. Advisory Fee for Premium Customers: Various coaching packages, which generally range from about $150 to $550 per session are available as a supplement to subscription-based packages . Data as of May 31, 2023.

Ellevest's platform caters primarily to women, using a gender-based investing approach that factors in issues like income level, earnings curve, and life expectancy. The platform also offers educational materials on a range of investing and career topics.

Its basic offering, Ellevest Essential, gives users an individual taxable account. Ellevest also offers two other service tiers that have additional features, including retirement accounts and planning. Ellevest portfolios are made up of a mix of mostly low-cost ETFs and mutual funds that cover 16 asset classes. Clients can also choose to invest in Ellevest's Impact Portfolios, which invest in ESG and impact funds.

Morningstar did not assess Ellevest because of Morningstar's ownership stake in the firm.

J.P. Morgan Automated Investing

Fee assumes a $15,000 account balance. Advisory Fee for Premium Customers: 0.60% . Data as of May 31, 2023.

J.P. Morgan Automated Investing uses a questionnaire to assess users' risk tolerance, goals, and time horizon. Its portfolios are composed of JPMorgan ETFs that cover eight asset classes. Despite charging account management fees on the higher end of the robo-advisor spectrum, J.P. Morgan Automated Investing doesn't offer additional services like tax-loss harvesting or financial planning tools.

The platform's integrated app may appeal to Chase users. It allows customers to access their bank, credit card, and investment information in one place.

Morningstar did not assess J.P. Morgan Automated Investing because some funds in which it invests track Morningstar indexes.

The Robo-Advisor Landscape report was designed to provide useful information to consumers before they sign up for a robo-advisor.

In the assessments, Morningstar's analysts prioritized low, transparent fees; a robust risk-tolerance questionnaire; logical mapping to portfolios; sound portfolio diversification that steers clear of questionable asset classes and investment tactics; and a broad range of planning-related features.

Morningstar scored robo-advisors on a five-point scale (High, Above Average, Average, Below Average, and Low) along with four dimensions: total price (30% weighting); the process used to select investments, construct portfolios, and match portfolios with investors (30%); the organization behind the digital platform (20%); and the breadth of services (20%). Morningstar weighted each category score and then summed it to arrive at an overall score, which was then used to rank the robo-advisors.

In our evaluation of each provider, we assumed a $15,000 account balance for ease of comparison and have noted providers whose fees decrease for higher investment amounts.

Get the Report For more information on the methodology, download the full report .

About the Author

Amy C. Arnott, CFA is a portfolio strategist for Morningstar.

Contributors

Research authors: Drew Carter, Dan Culloton, Gabriel Denis, David Kathman, Alec Lucas, Elizabeth Templeton, Lan Anh Tran Design editor: Nura Husseini-Yoon Editors: Emelia Fredlick, Margaret Giles Project manager: Connor Gallagher

These research authors and research contributors are employees of Morningstar Research Services LLC.

This content is not intended to be individualized investment advice, but rather to illustrate possible factors that can impact financial decisions. Investors should consider this information in the full context of their own financial decisions.

Read our editorial policy to learn more about our process.

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How Robo Platforms Transform Traditional Advisory Business

Planners and asset managers can serve smaller clients and spend more time on big-picture topics.

Robo Platforms Transform Advisory Firms

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Robo platforms free up traditional advisors to provide more service.

Financial advisors are increasingly turning to robo advisors , technology platforms that not so long ago were viewed as fierce competition.

At their most basic, robo advisors provide digital, algorithm-based investment platforms. The first company that offered this service was Betterment, which launched in 2008 and began opening client accounts two years later.

Initially, robo advisors operated with little, if any, human interaction. They would gather data from clients using online surveys. Based on those results, the robo advisor would assign the client to an inexpensive portfolio of index exchange-traded funds that would be rebalanced at specified intervals, determined by an algorithm.

That basic model still exists, but robo advisor firms now offer a greater range of services. Some added mutual funds as part of their offerings, some can hold single stocks and others include financial planning software or even sessions with a human financial planner.

Several companies now operate robo advisors. In addition to Betterment, the roster includes Personal Capital, SoFi, Ellevest, SigFig, Vanguard, TD Ameritrade and Charles Schwab, among others.

Robo Platforms Free Up Advisors

In response to the growth of robo advisors, traditional advisors ramped up their planning capabilities and emphasized their personal touch and ability to address any complex situation a client may have.

While those remain key points of differentiation, it turns out that robo platforms actually free up traditional advisors to provide more service. The robo firms offer special platforms just for financial advisors to hold client accounts. The robos handle rebalancing, as well as performance reporting and billing, allowing advisors and planners to focus on big-picture planning topics with clients.

Because robo platforms are inexpensive, financial advisors often use them for smaller accounts or clients with fewer investable assets . That's a shift from the traditional focus on high net worth clients.

"To continue to grow, the financial planning industry will need to evolve and serve clients who may have traditionally felt left out of the conversation," says Kevin Smith, vice president of Wealthspire Advisors, based in New York.

Smith's firm launched Wealthspire Pathways, a digital advisor platform that combines low-cost automated investing with a tailored financial plan and a dedicated advisor. These services have historically been available to higher net worth clients, but Smith says the firm's robo offering is a way to engage a greater range of clients, especially younger investors.

New Platform Disrupts the Industry

Smith acknowledges that the emergence of digital advisor platforms disrupted the financial services industry, leaving many advisors wondering if their relationship structure would become obsolete.

He says Wealthspire Pathways was designed to use digital technologies while preserving the personal relationship that clients typically expect.

"It reflects the future of financial advice, which lies in embracing new technology in a way that not only enhances the client experience but makes our expertise more accessible," he says.

"As a firm, we felt that there is an unfulfilled niche for people that could greatly benefit from financial planning but believe it is a service only for the wealthy or that they would be better off doing it themselves to save money," Smith adds. "The fact is that those with lower assets or without industry knowledge often stand to gain the most through professional planning."

Gwen Garrison, president and financial advisor at LifePlan Financial Advisors in Newnan, Georgia, uses a robo platform called $ymbil, developed by her firm's broker-dealer , Ladenburg Thalmann, and designed so clients with fewer assets can begin investing.

When the platform launched, Garrison says, she was delighted. "It's kind of like an incubator. I still use it for small accounts for whom a more traditional portfolio manager account is too expensive relative to the size of the account."

Garrison appreciates that $ymbil includes her contact information on a client's log-in page. "So if they need help, they can call me. I also can monitor the accounts and see how they are doing. We set an alert for when the account reaches the goal that we set for the incubation period," she says.

Most of Garrison's clients are middle income and don't fall into the high net worth category.

"They do not know a lot about investments and want someone watching over their investments, even in a robo advisor," she says. "They are vulnerable in that if they have major losses, it can seriously impact their ability to be financially secure now and in retirement."

Robo Advisors Offer Efficiency

Andrew Komarow, founder of Tenpath Financial Group in Farmington, Connecticut, also uses a robo platform for clients with smaller accounts. Because the robo advisor charges low fees, it's an efficient way to serve these clients. He uses a service offered by his custodian, LPL Financial.

"For smaller accounts to scale effectively, you can't be bogged down with trading," he says. "If someone is interested in working with me and they fit my model, then I will absolutely mention it. At the end of the day, the clients are working with me for the value add I provide."

He found that the robo platform is also useful for existing clients who may be making small contributions to a qualified retirement account, such as a Roth individual retirement account. "Instead of charging more for smaller accounts, I charge the same, and the robo might charge slightly more," he says.

Taxable, or nonqualified, accounts pose a challenge for advisors using a robo platform. Moving an account to a robo platform usually entails selling existing positions and reinvesting in an ETF or mutual fund model. Because many of these taxable accounts have large capital gains, a move to a robo platform could result in a large tax bill for the client. That's something most advisors want to avoid.

David Hicks is an investment advisor at Oakmont Advisory Group in Albuquerque, New Mexico, and founder of Smpl Wealth, a robo-based advisory platform. Hicks says his firm now handles taxable accounts both inside and outside of robo advisors.

But all accounts are reviewed before transitioning to a robo strategy. "If an account is simply moved to a new strategy and no due diligence has been performed, then a transition could potentially cause unnecessary capital gains," he says. "On the other hand, passive strategies are often best for taxable accounts, and an automated option will be more efficient over the life of the investment."

Wealthspire's Smith also acknowledges concerns when it comes to capital gains taxes and reallocating into a robo platform.

"It absolutely is a problem to just dump a taxable account into a robo without first reviewing the potential tax consequences," he says. "We always review the embedded gains in a taxable account before it is transferred to the robo and have a conversation with the client about the tax consequences."

Clients Need to Understand

Smith says the biggest concern for advisors using a robo offering is to be sure clients understand how it works. "Communication is key here. Making sure the client knows any positions transferred into the robo account will be liquidated and the model will be purchased," he says.

He adds that it's important clients understand they can't make direct trades in a robo-advised account, as all securities are part of a model. "This also means a robo account should always be used as a long-term investment account. It is not ideal to use a robo if you have a need to constantly withdraw funds and need instant access to those funds," Smith says.

Hicks also has a suggestion for financial planners and asset managers considering a robo offering.

"There are more options available now, so my advice is to pick the one that makes the most sense for your tech stack, so it can be more easily integrated," he says. "It's really easy to be sold on a certain robo offering. It might look great on paper, but later you find out that it doesn't communicate well or perform well on the service side. It can take some trial and error to find the right robo offering, and clients are often at the mercy of that practice."

Tags: investing , stock market , financial advisors , Financial Advisor Advice

The Most Important Ages for Retirement Planning

Comparative assessments and other editorial opinions are those of U.S. News and have not been previously reviewed, approved or endorsed by any other entities, such as banks, credit card issuers or travel companies. The content on this page is accurate as of the posting date; however, some of our partner offers may have expired.

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Robo-Advisors – Business Models and Strategies

Online asset management has been experiencing a rapid rise in Germany for several years. Since 2017, the number of users has grown by a factor of 7 from around 291,000 in 2017 to around 2.01 million in 2020 (cf. o.V. 2020), while the investment volume has increased more than tenfold from around 756 million euros to 8.068 billion euros (cf. o.V. 2020). Two factors in particular are key to this trend: firstly, the loss of trust in personal banking advisory services caused by the financial crisis in 2007, and secondly, the increasing demand for digital offerings by digital natives. The new generation of customers who have grown up with smartphones and tablets, also known as “Generation Y,” is much more attuned to electronic communication, which means that personal contact such as with customer advisors at banks is losing relevance (cf. Alt/Puschmann 2016, 29). In the course of the shift from a personal, individual customer experience at a bank to the desire for standardized and digitized processes, “robo-advisors”, which replace personal, human advice with the offer of algorithm-based investment proposals, are becoming increasingly important (cf. Dapp 2016, 1). For this reason, in this series of articles, I would like to provide an overview of what a robo-advisor is, what business models and strategies robo-advisors are pursuing, and how the traditional customer advisory process is changing through the use of robo-advisors. The articles are based on my bachelor thesis “An Analysis of the Impact of Robo-Advisors on the Customer Advisory Process in the Investment Sector”, which I wrote at the Information Systems Institute of the Faculty of Economics at Leipzig University.

Last week’s post was about how robo advisory services are defined and how they came into being, whether they are serious competition for banks, and what stage of development robo-advisors are at now . Today I present the prevailing business models and strategies of robo-advisors.

Business Models

As mentioned in the last article, it is not possible to define exactly what a robo-advisor is, as the individual providers offer a range of services of varying breadth. In fact, robo-advisors have long since ceased to offer mere recommendations or advice, and most providers are steadily expanding their services into a fully integrated solution. Accordingly, people now associate a robo-advisor with a platform that can also be used to make an investment directly (see [Bloch/Vins 2017, 114]). However, this service, for example, is linked to certain regulatory requirements, which are presented below. It should be noted here that this is the regulatory framework in Germany. In terms of regulation, four business models can be distinguished in the area of robo advisory services:

• investment brokerage (german: Anlagenvermittlung ),
• investment advice ( Anlagenberatung ),
• acquisition brokerage ( Abschlussvermittlung ), as well as
• financial portfolio management ( Finanzportfolioverwaltung ), also known as asset management.

Basically, the breadth of the service offering of each individual robo-advisor is determined by the respective permission, which is mandatory for one of the four business models mentioned. The main difference between the business models lies in who makes the investment decision, i.e. decides on the purchase of the securities: the customer or the provider. In all business models except asset management, this is the customer; in asset management, this is part of the provider’s service, which enjoys a certain degree of discretion. Robo-advisors providing only investment brokerage or advice are considered so-called “financial investment intermediaries” ( Finanzanlagenvermittler ) and are not classified as financial services institutions, unlike “acquisition brokers” and “financial portfolio managers.” Financial investment intermediaries in general specifically advertise certain investment products, a personal-individual consultation is only partially carried out here.  In contrast to the investment broker, the investment advisor asks for data on the investor’s personal situation, such as income and assets, as well as investment goals, which further narrow down the selection of the right investment product for the customer, allowing a more individualized investment proposal to be presented. After the customer advisory process, for both the investment broker and the investment advisor, the customer contact ends with their onward referral to the product provider. A acquisition broker goes one step further and makes the desired investment on behalf of the customer. Finally, the financial portfolio manager has the most comprehensive offering and accompanies the customer beyond the customer advisory process. In compliance with defined rules, the latter can manage the customer’s portfolio independently and adjust it as required. Robo advisory services in the true sense of the term can only be found with providers offering investment advice or financial portfolio management, as here the customer receives an investment proposal that is as individual as possible and takes into account their asset situation and goals. The recommendation is made on the basis of the questions previously answered (see [Oppenheim/Lange-Hausstein 2016, 1966ff]).

Since the ultimate goal of robo-advisors is to replace the advice provided by a human investment advisor and a trend toward increasingly comprehensive solutions can be observed, I will assume in the further course that a robo-advisor has a license to manage assets and can thus be classified as a financial services institution.

In addition to a low minimum investment amount, ongoing annual costs are also an important component of investment advice. European robo-advisors offer their services for an average of around 0.8 percent of the invested capital, while U.S. robo-advisors charge as little as 0.4 percent. Considering a similar portfolio, competing banks and asset managers charge significantly more at around one percent on average (see [Kaya 2017, 9f]). The reason that robo-advisors can charge a lower service fee is that investments are mostly made in so-called “exchange-traded funds” (ETFs). Around 96 percent of European providers prioritize ETFs as their most important investment instrument, among other things, and 55 percent even use them exclusively (see [Kaya 2017, 4]). Exchange-traded funds are mostly passively managed index funds that are traded on exchanges and thus without issue surcharges (see [Müller/Pester 2019, 233]). The fact that they merely track a market index such as the DAX and the securities and their respective shares in the index are predefined means that a fund manager is no longer necessary (cf. [Müller/Pester 2019, 230]). Thus, ETFs can be offered at a significantly lower cost than actively managed funds, which in turn benefits the customers of robo-advisors through a lower service fee. In addition to the cost factor, ETFs also offer investors a high degree of diversification or risk spreading of their investment: for example, each index fund consists of several shares, bonds or commodity units, depending on which asset classes the ETF relates to (see [Ruffner/Süer 2017, 173]). To further increase diversification, investments are made in three to 15 different ETFs per customer and per portfolio, depending on the respective provider, which are integrated into five to 21 model portfolios. Robo-advisors basically only offer their customers prefabricated portfolios, which only need to be allocated to the customer depending on the respective risk assessment (cf. [Hölscher/Nelde 2018, 69]).

Robo-advisors can follow an active or passive investment approach not only in terms of their product range, but also in the composition of the individual products. In active management, for example, the market is constantly monitored and, on the basis of this, the securities that appear to be most advantageous at a given time are included in the portfolio. This targeted approach is described as so-called “stock picking” (see [Müller/Pester 2019, 229f]). Due to market fluctuations, there are thus regular purchases and sales of securities with the aim of achieving a higher return than the passive market. In the course of this, the percentage distribution of the asset classes in the portfolio can also be continuously adjusted and regular risk assessments carried out. As a result, the portfolio may be subject to constant change. The passive management approach is based on the strategy of maintaining the portfolio created at the beginning, including the asset allocation and the defined securities, unchanged and independent of market fluctuations. If a change in asset allocation should occur due to market fluctuations, the original state can be restored through various adjustment methods, also called “rebalancing”. In contrast to active management, this adjustment is not carried out on an ongoing basis, but at predetermined times or according to specific rules. In so-called “periodic rebalancing”, a restoration of the asset allocation is carried out as needed at the time of a previously defined temporal interval change. Another variant of rebalancing provides for an adjustment only if the portfolio value exceeds or falls below a previously defined mark, the threshold (see [Hölscher/Nelde 2018, 69]).

Next week, between Christmas and New Year, the blog will take a short break. After that, we will continue with the question of how much the customer advisory process of a robo-advisor differs from that of traditional investment advice. For this, I will first introduce both advisory processes in the next part. So stop by again in two weeks or register to make sure you don’t miss any of the posts. And until then: Merry Christmas and a Happy New Year!

• Latest Posts

• The Robo-Advisor – A Substitute for the Human Investment Advisor? - 03.02.2021
• What Distinguishes a Robo-Advisor? - 22.01.2021
• Robo-Advisors vs. Traditional Customer Advisors - 08.01.2021

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Robo-Advisors: History and Investing Strategy

Explosive growth, portfolio rebalancing.

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Hiring a Robo-Advisor

Target demographic, robo-advisors and regulation, how robo-advisors get paid, the best-in-class robo-advisors, the bottom line.

• Automated Investing

What Is a Robo-Advisor?

Investopedia / Michela Buttignol

A robo-advisor (sometimes without the hyphen, as roboadvisor) is a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision. A typical robo-advisor asks questions about your financial situation and future goals through an online survey. It then uses the data to offer advice and automatically invest for you.

Other common designations for robo-advisors include "automated investment advisor," "automated investment management," and "digital advice platforms."

The best robo-advisors offer easy account setup, robust goal planning, account services, and portfolio management. Additionally, they offer security features, comprehensive education, and low fees.

Key Takeaways

• Robo-advisors are digital platforms that provide automated, algorithmic investment services with minimal human supervision.
• They often automate and optimize passive indexing strategies based on modern portfolio theory .
• Robo-advisors are often inexpensive and require low opening balances, making them available to retail investors.
• They are best suited for traditional investing and aren't the best options for more complex issues, such as estate planning.
• Robo-advisors have been criticized for their lack of empathy and complexity.

The first robo-advisors, Betterment and Wealthfront , launched in 2008. Wealthfront began as a mutual fund company. It planned to assist the tech community, then realized that computer software could make investment advice more accessible. Betterment, on the other hand, began with the initial purpose of rebalancing assets within target-date funds (TDFs) . It sought to help manage passive, buy-and-hold investments through a simple online interface.

The technology was nothing new. Human wealth managers have been using automated portfolio allocation software since the early 2000s. But until Betterment and Wealthfront launched, wealth managers were the only ones who could buy the technology, so clients had to employ a financial advisor to benefit from the innovation.

Today, most robo-advisors use passive indexing strategies that are optimized using some variant of modern portfolio theory (MPT). Typically, the account holder can't choose which mutual funds or exchange-traded funds (ETFs) to invest in or purchase individual stocks or bonds in their account.

Some robo-advisors offer optimized portfolios for socially responsible investing (SRI), halal investing, or tactical strategies that mimic hedge funds. They also can handle much more sophisticated tasks, such as tax-loss harvesting , investment selection, and retirement planning .

The industry has experienced explosive growth. According to Polaris Market Research, the robo-advisory market size was valued at $7.39 billion in 2023 and is projected to grow from $9.50 billion in 2024 to $72.00 billion by 2032, a CAGR of nearly 29% .

As of December 2023, the largest robo-advisor by assets under management (AUM) was Vanguard Digital Advisor, with $289 billion.

The majority of robo-advisors use modern portfolio theory (or some variant) to build passive, indexed portfolios for their users.

Once portfolios are established, robo-advisors continue to monitor them to ensure that the optimal asset-class weightings are maintained, even after market moves. Robo-advisors achieve this by using rebalancing bands .

Rebalancing Bands

In rebalancing bands, every  asset class , or individual security, is given a target weight and a corresponding tolerance range. For example, an allocation strategy might include the requirement to hold 30% in  emerging market  equities, 30% in domestic blue chips, and 40% in  government bonds  with a corridor of ±5% for each asset class.

The use of rebalancing bands means that, given the ±5% corridor, emerging market and domestic blue-chip holdings can fluctuate between 25% and 35%. Government bonds can fluctuate between 35% and 45%. When the weight of a holding moves outside of the allowable band, the entire portfolio is rebalanced to reflect the initial target composition.

In the past, this type of subtle rebalancing was frowned upon because it was time-consuming and generated transaction fees. However, low-fee robo-advisors are designed to handle rebalancing automatically.

Tax-Loss Harvesting

Another type of rebalancing commonly found with robo-advisors—made cost-effective through algorithms—is tax-loss harvesting. Tax-loss harvesting is a strategy that involves selling securities at a loss to offset a capital-gains tax liability.

This strategy is typically employed to limit the recognition of short-term capital gains . Robo-advisors do this by maintaining two or more stable ETFs for each asset class. So, if the S&P 500 ETF loses value, a robo-advisor will automatically sell it to lock in a capital loss; simultaneously, it buys a different S&P 500 ETF.

It's worth bearing in mind that the IRS  wash-sale rule  prevents investors from re-purchasing the same security or a security that is substantially identical within 30 days from its sell date. However, robo-investment platforms should have algorithms in place that incorporate rules like this.

Make sure your robo-advisor is programmed to select ETFs appropriately so that you avoid wash- sale violations.

Benefits of Robo-Advisors vs. Traditional Financial Advisors

The emergence of robo-advisors has broken down some of the traditional barriers between the financial services world and average consumers. Because of these online platforms, sound financial planning is now accessible to almost everyone, not just high-net-worth individuals.

• Robo-advisors are low-cost alternatives to traditional advisors. By eliminating human labor, online platforms can offer the same services at a fraction of the cost.
• Most robo-advisors charge annual flat fees of less than 0.4% per specific amount managed. That is much less than the typical 1% charged by a human financial planner (or more for commission-based accounts).
• With robo-advisors, it's generally easier to keep tabs on investments. You can log in 24/7 as long as you have an internet connection.
• It takes significantly less capital to start investing when using robo-advisors. One of the most popular robo-advisors, Betterment, has no account minimum for its basic account offering.
• Robo-advisors are efficient. Before robo-advisors and online brokerage accounts, if you wanted to execute a trade, you'd have to call or meet with a financial advisor, explain your needs, and wait for them to execute your trades. Now, you can do all of that with the click of a few buttons in the comfort of your home.
• Though using a robo-advisor may limit your investment options, this can be beneficial because buying individual stocks or trying to beat the market can produce poor results. On average, ordinary investors often see better results with an indexing strategy.

Some human advisors won't take on clients with less than $25,000, $50,000, or sometimes even $100,000 or more in investable assets.

Limitations of Robo-Advisors

• Many in the industry have doubts about the viability of digital advisors as a one-size-fits-all solution to wealth management.
• Given their current technological capabilities and minimal human presence, robo-advisors have been criticized for lacking empathy and sophistication.
• Robo-advisors are good entry-level options if you have a small account and limited investment experience. You may find them lacking if you need services like estate planning, complicated tax management, trust fund administration, and retirement planning.
• Automated services are also ill-equipped to deal with unexpected crises or extraordinary situations. For example, robo-advisors won't know if you're between jobs or dealing with an unexpected expense—your funds could be drained unexpectedly by automatic withdrawals.
• A study conducted by Investopedia and the Financial Planning Association found that consumers prefer a combination of human and technological guidance, especially when times are rough. According to the report, 40% of participants said they wouldn't be comfortable using an automated investing platform during extreme market volatility.
• Robo-advisors operate on the assumption that you have defined goals and a clear understanding of your financial circumstances, investment concepts, and potential investment outcomes. For many investors, that is not the case.

Convenient, easy access

Lower cost, low starting capital

Investment experience not required

Straightforward index investing

Growing number of valuable services

Lacks human interaction

Limited investment opportunities

Investor must define financial situation and investment goals

One-size-approach not right for all

Uneven technology standards

Robo advisors don't all cost the same amount and offer all the same features. Each one may excel in particular areas, so it's important to do some research first. Dedicating a bit of time to finding the right one could turn out to be one of your smartest investments.

There are also hybrid robo-advisors, which essentially seek to combine the benefits of automated investment with human financial advice.

Opening a robo-advisor account usually entails completing a short, risk-profiling questionnaire and evaluating your financial situation, time horizon , and personal investment goals. In many cases, you will have the opportunity to link your bank account directly for quick and easy funding of your robo-advisory account.

Many digital platforms target and attract certain demographics more than others. For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.

This population is much more comfortable sharing personal information online and entrusting technology with essential tasks, such as wealth management. Indeed, the marketing efforts of robo-advisory firms typically employ social media channels to reach these investors.

The U.S. Securities and Exchange Commission (SEC) issued a risk alert to investors in November 2021 regarding compliance issues with many robo-advisors. Be sure to stay informed of these and other issues by checking FINRA Investor Alerts and the SEC Division of Examination websites for information.

Robo-advisors hold the same legal status as human advisors. Accordingly, they must be registered with the SEC and are subject to the same securities laws and regulations as traditional broker-dealers .

Most robo-advisors are members of the Financial Industry Regulatory Authority (FINRA) . You can use BrokerCheck to research robo-advisors in the same way that you would a human advisor.

Assets managed by robo-advisors aren't insured by the Federal Deposit Insurance Corp. (FDIC) . That's because they are securities held for investment purposes, not bank deposits.

However, this doesn't necessarily mean clients are unprotected. For example, Wealthfront is insured by the Securities Investor Protection Corp. (SIPC) , meaning that if the company goes bust, investors will be reimbursed up to $500,000 of their invested balance. As you research robo-advisors, don't forget to check on the kind of insurance each has to protect your investment.

The primary way that most robo-advisors get paid is through a wrap fee based on assets under management (AUM) . While traditional (human) financial advisors typically charge 1% or more of AUM per year, many robo-advisors charge around 0.3% of AUM per year.

Another revenue stream is payment for order flow (PFOF) . This payment (typically fractions of a penny per share) results from directing trade orders to a particular market maker. PFOF can potentially result in better execution prices for clients. Typically, robo-advisors bundle various trade orders together into large block orders executed just one or two times a day.

Finally, robo-advisors can earn money by marketing targeted financial products and services to their customers, such as mortgages, credit cards , or insurance policies. This is often done through strategic partnerships rather than advertising networks.

If the costs of your robo-advisor outweigh returns on your investments, then you may be better off not using one.

There are hundreds of robo-advisors available in the U.S. and worldwide. More of them launch every year. They all provide some combination of investment management, retirement planning, and general financial advice.

Here's a look at our list of the best robo-advisors . See how we picked them by reading our methodology .

When evaluating a robo-advisor , pay attention to what asset classes and ETFs it invests in, as some are now moving away from passive index strategies and investing in somewhat riskier areas that could either outperform or underperform the market, such as " smart-beta " strategies.

What Does a Robo-Advisor Do?

Robo-advisors provide financial planning services through automated algorithms with no human intervention. They start by gathering information from a client through an online survey and then automatically invest for the client based on that data. Robo-advisors often use passive index investing strategies.

Can Robo-Advisors Make You Money?

Yes, you can make money with a robo-advisor, as you can with any other financial advisor.

Can You Lose Money With Robo-Advisors?

Yes, as with any investment you can lose money with robo-advisors if investments lose value or costs outpace portfolio returns.

Do Robo-Advisors Beat the Market?

Most robo-advisors won't beat the market. That's because their investing involves a passive index strategy that seeks only to replicate the market's return. Typically, robo-advisor investing is based on modern portfolio theory, which relates to constructing a portfolio that maximizes return within an acceptable level of risk.

Robo-advisors leverage advances in algorithmic trading and electronic markets to automate investment strategies for ordinary investors.

Often based on modern portfolio theory, robo-advisors are able to optimize investors' risk-return tradeoffs and automatically manage and rebalance their portfolios. Automation also allows for tax-loss harvesting and other strategies that were once too complex or expensive for ordinary investors.

With low fees and small minimum balances required to get started, robo-advisors may be a good choice for most long-term investors and may be especially attractive to younger, tech-forward individuals.

Jill E. Fisch, Marion Labouré, and John A. Turner. " The Emergence of the Robo-Advisor ."

Hayes, A. (2020). Enacting a rational actor: Roboadvisors and the algorithmic performance of ideal types . Economy and Society , 49 (4), 562-595.

Jonathan Walter Lam. " Robo-Advisors: A Portfolio Management Perspective ."

Polaris Market Research. " Robo Advisory Market Size, Trends, Industry Analysis Report ."

Investing in the Web. " The Largest Robo-Advisors by AUM ."

Vanguard. " Vanguard Digital Advisor Important Information ."

The American Association of Individual Investors. " What the Evolving Robo-Advisory Industry Offers ."

U.S. Securities and Exchange Commission. " Wash Sales ."

Harness Wealth. " Average Fees for Financial Advisors in 2023 ."

VettaFi. " Robo-Advisor Fees: What Is the True Cost ?"

Betterment. " Our Pricing ."

Smart Asset. " The Minimum Investment for a Financial Advisor ."

Investopedia and Financial Planning Association. " High-Tech and High-Touch: Investors Make the Case for Converging Automated Investing Platforms and Financial Planning ," Page 11.

Tan Zi Yi, Noor Ashikin Mohd Rom, Nurbani Md. Hassan, Mohamad Shaharudin Samsurijan, Andrew Ebekozien. " The Adoption of Robo-Advisory among Millennials in the 21st Century: Trust, Usability and Knowledge Perception ."

Eleonora Isaia, Noemi Oggero. " The Potential Use of Robo-advisors Among the Young Generation: Evidence from Italy ."

Financial Industry Regulatory Authority. " Investor Alerts ."

Securities and Exchange Commission. " Division of Examinations ."

U.S. Securities and Exchange Commission. " Investor Bulletin: Robo-Advisers ."

Wealthfront. " What Is SIPC Insurance ?"

• What Is a Robo-Advisor? 1 of 10
• Automatic Investment Plan: How it Works, Different Types 2 of 10
• How AI is Shaping the Advisory Landscape 3 of 10
• Robo-Advisor: Advantages and Disadvantages 4 of 10
• Robo-Advisor vs. Financial Advisor: Which is Better? 5 of 10
• Robo-Advisors and Young Investors 6 of 10
• Robo-Advisor Tax-Loss Harvesting: What It Means, How It Works 7 of 10
• Robo-Advisors and Impact Investing: What You Need to Know 8 of 10
• Is a Robo-Advisor Right for You? 9 of 10
• How to Evaluate a Robo-Advisor 10 of 10

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NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.

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12 Best Robo-Advisors of April 2024

The best robo-advisors charge low portfolio management fees and offer a range of services, including tax strategies, access to human advisors and a variety of portfolio options.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Low-cost financial advice and investment management are key components to building wealth, and robo-advisors can be an accessible way to get both: These services build and manage an investment portfolio for you for a low fee that's typically much less than what the typical financial advisor might charge.

The number of robo-advisors has swelled in the last decade, as has the range of services. The best robo-advisors now offer socially responsible investment portfolios, access to human financial advisors for basic investment and financial planning questions, high-interest cash management or savings accounts and digital financial planning tools.

Bottom line: These services are an inexpensive way to get comprehensive investment management and financial planning guidance. If you're the type of investor who wants to outsource your portfolio, a robo-advisor like the ones below may be a good fit for you.

Our deep, independent analysis of investment firms cuts through the details to find and evaluate the information investors want when choosing an investing account.

Over 60 investment account providers reviewed and rated by our expert Nerds.

More than 50 years of combined experience writing about finance and investing.

Hands-on testing of the account funding process, provider websites and investment platforms.

Dozens of objective ratings rubrics and strict guidelines to maintain editorial integrity .

To see our full methodology and learn more about our process, read our criteria for evaluating robo-advisors .

Robo-advisors can manage your investment account — including IRAs — for a fraction of the cost of a financial advisor. They can be a good choice for investors who want to be hands-off.

Best Robo-Advisors

Reviewed in: Oct. 2023

Period considered: Aug. - Oct. 2023

on Betterment's website

Paid non-client promotion

NerdWallet doesn’t invest its money with this provider, but they are our referral partner – so we get paid only if you click through and take a qualifying action (such as open an account with or provide your contact information to the provider). Most importantly, our reviews and ratings are objective and are never impacted by our partnerships. Our opinions are our own. Here is a list of our partners and here’s how we make money .

with a balance over $20K or qualifying recurring deposit. Otherwise, $4/month.

$10 to start

no promotion available at this time

Multiple portfolio options, including customization.

Low account minimum and fees

Fractional shares allow all cash to be invested.

Robust goal-based tools.

No direct indexing.

Why We Like It

Betterment has maintained its status as the largest independent robo-advisor for a reason: The company offers a powerful combination of goal-based tools, affordable management fees and no account minimum.

• Wealthfront

on Wealthfront's website

management fee

Get a $50 customer bonus

when you fund your first taxable investment account

Get $50 customer bonus when you fund your first taxable investment account (NerdWallet promotion).

Low ETF expense ratios.

Daily tax-loss harvesting.

Automatic rebalancing.

DIY and automated investing options.

No human financial advisors.

With Wealthfront, you get low-cost access to a diverse investment lineup, excellent planning tools and a variety of tax-saving strategies. The company also offers access to individual stocks for DIY investors.

• Vanguard Digital Advisor

on Vanguard's website

per year (approximately)

No advisory fees

your first 90 days of Vanguard Digital Advisor investment management (Enrollment requires a Vanguard account with a minimum of $3,000)

Access to Vanguard’s investing expertise and ETFs.

Low management fee relative to competitors.

Low investment expense ratios and no additional account fees.

Limited portfolio options and customization.

Vanguard Digital Advisor is an affordable robo-advisory service using several of Vanguard’s key ETFs to create a personalized retirement plan and portfolio for investors.

• Fidelity Go®

on Fidelity's website

Paid non-advisory client promotion

Paid non-advisory client promotion. NerdWallet maintains a 401k program through an affiliate of this provider; NerdWallet doesn’t invest its money with this provider, but they are our referral partner – so we get paid only if you click through and take a qualifying action. Being a referral partner influences which products we write about and where and how the product appears on our webpage. Most importantly, however, the content of our reviews and ratings are objective and are never impacted by our partnerships. Our opinions are our own. Here is a list of our partners and here’s how we make money .

Free management on balances under $25,000.

No investment-expense ratios.

Human portfolio oversight.

Integration with other Fidelity accounts.

No tax-optimization assistance.

Fidelity's robo-advisor, Fidelity Go, frequently makes our list of the best robo-advisor for its low fees — including free management on balances below $25,000 — integration with other Fidelity accounts and its use of Fidelity Flex funds, which have no expense ratios.

on Acorns' website

$10 Sign Up Bonus

Automatically invests spare change.

Cash back at select retailers.

Educational content available.

High fee on small account balances.

If you want to make the most of your spare change and get the occasional retailer kickback, there’s really no better place to do that. The automatic roundups at Acorns make saving and investing easy, and most investors will be surprised by how quickly those pennies accumulate. The downside? At small balances, Acorns fees can cut into or completely wipe away investment returns.

on Ellevest's website

2 months free

with promo code "nerdwallet"

No account minimum.

Goal-focused investing approach.

Portfolio mix that factors women’s needs.

A la carte sessions with coaches and CFPs.

No tax-loss harvesting.

Ellevest offers a single flat-fee plan which costs $12 a month. Clients get discounted access to professional financial planning, free educational resources and the only investing platform that factors in women’s pay gaps, career breaks and longer lifespans. Ellevest also offers Private Wealth Management for investors with $1 million or more.

• SoFi Automated Investing

on SoFi Invest's website

SoFi will match 2% of your contributions to your IRA

Offer lasts through Tax Day, 4/15/24. Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

Broad range of low-cost investments.

Free management.

Customer support.

Access to certified financial planners.

Limited account types.

Free management and access to financial advisors and career counselors make SoFi Automated Investing a solid choice for beginning and younger investors.

Want to compare more options? Here are our other top picks:

• Axos Managed Portfolios
• E*TRADE Core Portfolios
• Ally Invest Robo Portfolios
• Schwab Intelligent Portfolios®

Last updated on March 29, 2024

Methodology

NerdWallet’s comprehensive review process evaluates and ranks the largest U.S. brokers and robo-advisors. Our aim is to provide an independent assessment of providers to help arm you with information to make sound, informed judgements on which ones will best meet your needs. We adhere to strict guidelines for editorial integrity.

We collect data directly from providers through detailed questionnaires, and conduct first-hand testing and observation through provider demonstrations. The questionnaire answers, combined with demonstrations, interviews of personnel at the providers and our specialists’ hands-on research, fuel our proprietary assessment process that scores each provider’s performance across more than 20 factors. The final output produces star ratings from poor (one star) to excellent (five stars).

For more details about the categories considered when rating providers and our processes, read our full broker ratings methodology and our full robo-advisor ratings methodology .

To recap our selections...

NerdWallet's Best Robo-Advisors of April 2024

Frequently asked questions.

Robo-advisors automate investment management by using computer algorithms to build you a portfolio and manage your assets based on your goals and your tolerance for risk. Since portfolio management is handled by software rather than a human financial advisor, robo-advisors charge lower fees, which can translate to higher long-term returns for investors.

Opening a robo-advisor account is very similar to opening a brokerage account or bank account: You'll provide some personal information and then link an existing account from which you can transfer money to fund the new account. The primary difference is in most cases, robo-advisors will take you through an onboarding quiz to help determine how to invest your portfolio. These quizzes generally ask about your investment goals, risk tolerance and time horizon, and the robo-advisor will use your answers to build the most optimal portfolio for you.

Robo-advisors use advanced software to handle many of the tasks that used to require expensive experts to manage. Services range from automatic rebalancing to tax optimization, and require little to no human interaction. A robo-advisor might be a good fit if you prefer to be largely hands-off with your investments and you don’t have the kind of complex financial situation that requires a direct relationship with a human financial advisor.

That said, many providers offer access to human advisors available for questions related to account management or long-term investment planning — though these services may cost more.

Here’s what you should consider:

Management fees. This is what you’ll pay annually to have an account at a robo-advisor.

Expense ratios. These are like management fees, only they’re paid not to the robo-advisor, but to the investments the robo-advisor uses. Mutual funds, index funds and exchange-traded funds all charge this annual fee to cover the costs of running the fund.

Account types. Investment accounts fall into two general categories: Retirement accounts, such as IRAs and 401(k)s, that offer tax advantages while adhering to certain rules; and taxable accounts, where there are no specific tax advantages but also no limits on contributions or distributions.

Investments. Most robo-advisors use low-cost index funds and ETFs.

Rebalancing. Portfolios are fluid, and market fluctuations can cause the mix of investments you hold to get out of sync with your goals. Rebalancing brings that allocation back to its original mix.

Access to human advisors. Many robo-advisors have merged computer-driven portfolio management with access to human financial advisors. Some services offer a dedicated advisor to individual clients; others offer only email or online chat with a team of advisors.

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Best Robo-Advisors in April 2024

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Robo-advisors are a popular way to invest, and it’s easy to understand why. They offer low-cost portfolio management that meets the needs of many investors, along with some extra features that are tough, if not impossible, for human advisors to match. In a short time, robo-advisors have acquired hundreds of billions of dollars in assets under management, and industry experts only expect their popularity with consumers to grow in the years ahead.

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On This Page

• Top Robo-advisors
• Honorable Mentions

How much does a robo-advisor cost?

What to consider when choosing a robo-advisor, top reasons to choose a robo-advisor, disadvantages of using a robo-advisor, what is a robo-advisor.

The term robo-advisor sounds really high-tech, but it’s actually much simpler than you might think. A robo-advisor is a financial advisor that uses an  algorithm to automatically select investments for you.

The investment choices are based on things such as:

• How much risk you’re willing to bear
• What level of returns you want
• When you need the money

Based on these factors and others, the robo-advisor typically selects a portfolio of exchange-traded funds (ETFs) using sound investment theory. For example, the robo-advisor creates a diversified portfolio of ETFs, rather than just investing it all in one fund. Extensive research has shown that diversification reduces your risk and can actually increase your returns.

It’s simple to get started with a robo-advisor, and you can quickly set up an account online. And because it’s online and automated, robo-advisors are much cheaper than traditional in-person financial advice. Plus, you usually get some other cool benefits thrown in, too. Features such as portfolio rebalancing and tax-loss harvesting are typically offered, both of which should improve your returns over time.

Overview: Best robo-advisors in April 2024

Betterment sets a high standard for service. It offers automatic rebalancing , tax-loss harvesting, a personalized retirement plan, a variety of portfolio options (such as impact investing) and fractional shares in funds, so that all your money is invested rather than having to wait until you have enough to buy a full share. You can sync outside accounts, too, and receive advice on them, while customer support is available seven days a week. Betterment’s premium plan ups the game with access to a human advisor.

Bankrate overall rating: 5 out of 5 Management fee: 0.25 percent – 0.4 percent, depending on service level Account minimum: $0

Schwab Intelligent Portfolios

With Intelligent Portfolios, Charles Schwab is going after the robo-advisor market hard. Well-known for its investor-friendly practices, Schwab brings this same spirit to robos, with features such as rebalancing, automatic tax-loss harvesting and 24/7 access to U.S.-based customer service. And Schwab charges no management fee, so it’s worth saving up to meet the higher account minimum. If you want unlimited access to human advisors, you can get it if you bring $25,000 to the account and pay a $30 monthly fee – a real bargain for what you get. In fact, its easy-to-use interface and robust features earned Schwab Intelligent Portfolios a Bankrate Award for best robo-advisor .

Bankrate overall rating: 5 out of 5 Management fee: None Account minimum: $5,000

Wealthfront

One of the largest robo-advisors, Wealthfront offers goal-based investing that helps you understand how your financial choices today affect your future. Wealthfront also provides tax-loss harvesting, and literally hundreds of ETFs that you could add to your portfolio, so you can make a truly custom portfolio. Plus, the firm provides a competitive interest rate on its FDIC-insured cash management account and doesn’t charge any fees for it. Also useful, you can borrow against the value of your account at especially attractive interest rates.

Bankrate overall rating: 5 out of 5 Management fee: 0.25 percent Account minimum: $500

Fidelity Go

Long known for its brokerage, Fidelity Investments also offers a highly capable robo-advisor, with the core functions (portfolio management, rebalancing) at a price that helps beginners get started. It charges no fees if your assets are under $25,000. From there, you’ll pay one low all-in price of 0.35 percent of your assets. Fidelity Go makes an especially good fit for existing customers, since they’ll be able to access all their accounts on one dashboard and easily open a cash management account if they need one. And you get Fidelity’s helpful and friendly customer support staff on top of it all.

Bankrate overall rating: 4.5 out of 5 Management fee: $0 for accounts with less than $25,000; 0.35 percent above $25,000 in assets (includes funds’ costs) Account minimum: $0, but need $10 to start investing

Interactive Advisors

With Interactive Advisors, you get to pick the portfolio you want, from totally automated portfolios to ones created and managed by outside investors. While the fees vary widely, you’ll have solid low-cost choices. There’s no management fee, but also no tax-loss harvesting unless you’re invested in the taxable custom asset allocation portfolios. You’ll also receive a weekly client email and be able to access educational resources through Interactive Brokers. Customer support is available Monday through Friday during normal business hours.

Bankrate overall rating: 4.5 out of 5 Management fee: None Account minimum: $100

M1 Finance is part-robo-advisor, part-broker, and it lets you have total freedom to invest in what you want. You’ll be able to build out your own custom portfolio and then set it on autopilot and let M1 do the rest. It comes with a solid cash management account, too. You’ll be able to get started with just $100 for a taxable account and M1 offers fractional shares, so the full amount will be invested. Unfortunately, M1 does not offer tax-loss harvesting.

Bankrate overall rating: 4.5 out of 5 Management fee: None Account minimum: $100 for taxable accounts/$500 for retirement accounts

SoFi Automated Investing

SoFi has expanded into the realm of robo-advisors with an incredibly investor-friendly service. Unlike many of its robo-advisor rivals, SoFi doesn’t charge a management fee. With an average fund fee of less than 0.10 percent and a $1 account minimum, this robo is a no-brainer for investors looking to curb costs. The company provides automatic rebalancing and goal-based planning to help you reach your life objectives. Plus, you’ll get career services, access to financial advisors and discounts on other SoFi products for no extra cost.

Bankrate overall rating: 4.5 out of 5 Management fee: None Minimum to invest: $1

Honorable mentions

The following robo-advisors scored well in our reviews and were deserving of an honorable mention.

Ally Invest Robo Portfolios

Ally Invest Robo Portfolios keeps costs low by offering an option for no management fee in return for keeping 30 percent of your portfolio in cash. You’ll pay 0.30 percent annually for a more fully invested portfolio, which is built using low-cost funds. Automatic portfolio rebalancing is included, but tax-loss harvesting isn’t available and fractional shares are only offered on reinvested dividends.

Bankrate overall rating: 4 out of 5

Formerly Personal Capital, Empower provides unlimited access to human advisors who customize a portfolio to your needs while offering other perks such as tax-loss harvesting. But you’ll pay one of the highest management fees, though likely less than at a traditional advisor.

Marcus Invest

Marcus Invest offers a solid robo-advisor service that may appeal particularly to customers who already have a high-yield savings account with the online bank. The annual management fee is right on the industry standard at 0.25 percent, but every investment fund is available for less than 0.20 percent with some as low as 0.05 percent. You also won’t get nicked for other account fees that some robo-advisors charge. Portfolios are built from 20 ETFs across seven different asset classes, and municipal bond funds are used as part of its tax strategy, which does not include tax-loss harvesting.

Wells Fargo Intuitive Investor

Wells Fargo Intuitive Investor offers the core robo-advisor features (portfolio management and rebalancing) and then kicks it up with tax-loss harvesting. If you’re already a Wells customer, it could make extra sense to check out this robo-advisor. Not only will you consolidate your accounts at one company, but Wells will knock down its usual management fee of 0.35 percent to 0.30 percent, if you have a Wells Fargo checking account. This robo offers fractional shares, allowing you to get your full investment to work immediately, and you’ll have access to human advisors.

While the costs vary from service-to-service, typically the cost of a robo-advisor has two major components:

• Management fee: This fee typically costs 0.25 percent to 0.5 percent of your assets on an annual basis, though fees may be lower or higher. So every $10,000 invested would incur management fees of $25 to $50 each year based on those percentages.
• Funds’ expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more. These fees are deducted proportionally on a daily basis by the fund company, and they will be almost invisible to you.

While sometimes the robo-advisor charges a few incidental fees when you require something special, in general you won’t run up any extra charges. So it doesn’t cost you anything extra to buy and sell funds, move money out of your account or change your allocation if your risk tolerance or a financial goal changes.

Since you’re investing, your returns aren’t guaranteed by the Federal Deposit Insurance Corporation (FDIC) , so you can lose money. However, money that your robo-advisor puts in a cash account is typically protected by the FDIC.

• Account types and minimums: You’ll want to make sure any robo-advisor you’re considering has the account type that you’re looking to open. Most robo-advisors offer individual accounts, but not all of them offer popular retirement accounts such as traditional and Roth IRAs . Account minimums can also vary between advisors and range from nothing to tens of thousands of dollars.
• Costs are also important to consider: Make sure to understand the annual management fee you’ll be charged as well as the fees associated with the ETFs that will comprise your portfolio. Some of the more expensive ETFs offered could push your overall fees to near 1 percent, which is on par with a traditional financial advisor.
• Additional features: Keep an eye out for additional features offered beyond the basic portfolio building. Some robo-advisors offer automatic daily rebalancing of your portfolio , which will ensure your allocations remain in the recommended range. Tax-loss harvesting is another option that some platforms offer to help you save on taxes in an individual or joint taxable account.
• Customer support: When something goes wrong, it’s nice to be able to find a solution quickly. Consider what hours you’ll be able to reach someone with questions about your account. Some robo-advisors give you the option of speaking with a human financial advisor for help with more complex questions.

A robo-advisor can be a good choice for many kinds of investors, depending on their needs and willingness to manage their investment account.

A robo-advisor is a solid pick if you:

• Want a professional to manage your money and develop a financial plan
• Are looking to start investing and want to go slowly and safely
• Want an alternative to a human advisor at low cost
• Would prefer not to spend much of your time on investments
• Don’t understand the markets or want to learn
• Want an account where you deposit money and everything is done for you
• Want a diversified portfolio that can help you retire

These reasons all center around the robo-advisor using its expertise to save you time, money and annoyance. So, a robo-advisor can make sense for new investors who want to learn how investing works or seasoned ones who don’t want to manage their portfolio any more.

It’s actually easy to get started with a robo-advisor and often you may need no money to do so.

A robo-advisor is a good investing choice for many kinds of investors, but it may not fit everyone.

Here are some disadvantages of using a robo-advisor:

• Lack of investment choice: If you want to choose your investments, a robo-advisor likely won’t be a good option. Robo-advisors usually select the investments and make the decisions, and only a few allow you even a little discretion in what they invest in.
• No guarantee of performance: Robo-advisors invest in stocks and bonds, and the prices of these assets can fluctuate a lot, especially in the short term. These are riskier investments than bank products, and a robo-advisor does not promise performance.
• No human to keep you on track: Many robo-advisors operate a strictly automated model and may charge an extra fee to speak with a human advisor. Human advisors can be great at keeping you focused and motivated to stick with your financial goals.
• Better for routine needs: Some robo-advisors are designed to help you with one or two goals, such as retirement, or routine needs. Those with more complex situations may want another solution, such as the option to consult with a human financial professional.

You’ll want to carefully examine your needs as you consider whether a robo-advisor is right for you. In many situations they can be an excellent choice, but in some cases they won’t be.

Bottom line

The biggest advantage of opening a robo-advisor account is having an experienced company manage your investments at a reasonable fee. But once you’ve opened the account, make sure to set up recurring transfers to boost your savings over time and reap the benefits of dollar-cost averaging.With their hands-off approach to investing, robos have made it easier than ever to open an account and get started on the path to financial security .

Note: Bankrate’s Brian Baker also contributed to this story.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Related content: Robo-advisors

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• The best retirement plans for individuals
• Best employer-sponsored retirement plans
• Best retirement plans for self-employed individuals and small businesses
• Which retirement plan is best for you?
• Why You Should Trust Us

Best Retirement Plans in April 2024

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The best retirement plan depends on your situation. You'll probably qualify for multiple retirement savings vehicles if you have taxable income or work for an employer. And even if you don't work, you'll still have options.

You can set up most retirement accounts through employers, but you'll also be able to open and manage your retirement accounts.

Best Retirement Plans

The primary types of retirement accounts are:

• Traditional IRAs : a tax-advantaged savings account that lets your funds grow tax-deferred
• Roth IRAs : a tax-advantaged savings account of after-tax funds (money that you've already paid taxes on)
• Spousal IRAs: spouses earning a low (or no) annual income may open a separate IRA in their spouse's name 
• Rollover IRAs: funds moved over from a former employer 401(k) plan into an IRA
• 401(k) plans : traditional or Roth, typically offered by for-profit employers
• 403(b) plans : available to most non-profit employees
• 457(b) plans: reserved for government employees
• Thrift savings plans : reserved for government employees

Additional individual retirement accounts include nondeductible IRAs or self-directed IRAs (more on that below). Investors also have the option to invest in precious metals with gold IRAs and silver IRAs. The best gold IRAs offer liquidity, low spread fees, account flexibility, low account minimums, and human advisor access. 

You can't use the traditional 401(k) account if you're self-employed. Instead, you'll have to pick a solo 401(k) or SEP IRA (you can supplement either account with an IRA if you choose).

Here are the options for small business retirement accounts:

SIMPLE IRAs

• Payroll deduction IRAs

Wealthfront's investment services feature a 0.25% annual fee and $500 minimum deposit, the robo-advisor offers a wide range of account types and investment strategies.

0.25%; 0.06 - 0.13% for low-cost investment funds

Traditional IRAs, Roth IRAs, and SEP IRAs

• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Low annual fee for investment accounts; crypto trust investments available
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Tax-loss harvesting
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Mobile app and investing and retirement tools
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Offers traditional, Roth, and SEP IRAs
• con icon Two crossed lines that form an 'X'. You need at least $100,000 to utilize additional investment strategies
• con icon Two crossed lines that form an 'X'. No human advisor access

Wealthfront is one of the best robo-advisor options if you're in search of low-cost automated portfolio management, and one of the best socially responsible investing apps for features like tax-loss harvesting, US direct indexing, and crypto trusts.

• Consider it if: You're looking for goal-based strategies for retirement and other savings goals.
• App store rating: 4.8 iOS/4.6 Android

Best Retirement Plans for Individuals

One of the most appealing components of independent retirement plans like IRAs is that you can open one as long as you've got taxable (earned) income. And even if you have an employer-sponsored retirement account, you can usually set up a traditional IRA, Roth IRA, and other independent retirement accounts.

Traditional vs. Roth IRAs

Traditional IRAs let you save with pre-tax contributions, while Roth IRAs allow you to contribute after-tax dollars toward your retirement savings. As long as you're eligible (more on that below), experts generally recommend Roth IRAs for early-career workers who expect to be in a higher tax bracket in the future when they're making withdrawals  and traditional IRAs for higher-income workers who could use a tax deduction today.

Traditional and Roth IRAs share the same contribution and catch-up contribution limits. The 2024 contribution limit is $7,000, with up to $1,000 in catch-up contributions. The biggest difference between the two is tax advantages and income limitations. The Roth IRA limits who can contribute and how much.

For Roth IRAs, single filers can only contribute the maximum amount in 2024 if their modified adjusted gross income (MAGI) is less than 146,000. You can still contribute less if you earn a little more, though.

You can find your MAGI by calculating your gross (before tax) income and subtracting any tax deductions from that amount to get your adjusted gross income (AGI). To calculate MAGI, you'll need to add back certain allowable deductions.

Allowable deductions that can be added back include passive income or losses, deductions for IRA contributions, rental losses, deductions for student loan interest, and more. Alternatively, you can ask your accountant or use an online calculator like the one below:

Married couples must earn less than $230,000 annually to contribute the full amount in 2024.

You don't have to worry about income limits for traditional IRAs. However, if a retirement plan at work covers you or your spouse, you must consider the income limits for tax-deductible contributions. Traditional IRAs and 401(k)s are funded with pre-tax dollars.

For instance, in 2023, single filers can deduct the maximum contribution amount ($6,500) if they make $73,000 a year or less. Married couples filing jointly can also make full deductions if they make $116,000 a year or less. The amount you can deduct phases out or decreases if your income exceeds these limits.

While you can contribute to a 401(k) and traditional IRA simultaneously, your ability to take a tax deduction for these contributions — across both accounts, combined — ends once you hit those income limits.

Spousal IRAs

There's also an option for married couples where one spouse doesn't earn taxable income. Spousal IRAs allow both spouses to contribute to a separate IRA as long as one spouse is employed and earns taxable income. This account allows the nonworking spouse to fund their own IRA. 

In 2024, each can contribute $7,000 (or $8,000 if they are 50 or older) for up to $16,000 per year.

Rollover IRAs

The best rollover IRAs let you convert your existing employer-sponsored retirement plan into an IRA, something experts generally recommend doing when you leave a job for a few reasons — primarily because you have more control over the investment options in an IRA than in a 401(k), and also because it's easier to consolidate your accounts for record-keeping.

Many online brokerages and financial institutions offer rollover IRAs; some will even pay you to transfer your employer-sponsored plan to the IRA.

Self-directed IRAs (SDIRAs)

You can fund a self-directed IRA using traditional or Roth contributions (meaning the $6,500 and $7,500 contribution limits in 2023 are the same across all three — the 2024 limits of $7,000 and $8,000 are the same, too). But the difference between these accounts is mainly one of account custody and investment choices.

Unlike traditional and Roth IRAs, the IRS requires that all SDIRAs have a certified custodian or trustee who manages the account. These third parties handle the setup process and administrative duties of the IRA (e.g., executing transactions and assisting with account maintenance).

SDIRAs also give investors access to a wider range of investment options. With traditional and Roth IRAs, you're limited to mutual funds, ETFs, stocks, and other traditional investments. But, SDIRAs allow you to invest in alternative assets like real estate, precious metals, and cryptocurrencies .

Nondeductible IRAs

Nondeductible IRAs are great for those who don't meet the income limits of Roth IRAs or make too much to qualify for a traditional IRA. For example, suppose you're filing taxes as an individual. In that case, you won't be eligible for a Roth IRA (even discounted contributions) if your MAGI exceeds $161,000 in 2023 or $240,000 for a married couple filing jointly.

Contributions for these accounts aren't tax deductible, meaning you'll be funding your IRA with post-tax dollars like a Roth IRA. The difference is that you'll still have to pay taxes on any earnings or interest from the account once you withdraw at age 59 and a half.

Best Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans are savings vehicles your employer provides. There are several types — including 401(k)s, 403(b)s, 457(b)s, and thrift savings plans — and in some instances, your employer will match a percentage of your annual contributions.

For-profit companies generally offer these plans, and most companies give you the choice between two versions: the traditional 401(k) or the Roth 401(k). Traditional 401(k)s grow with pre-tax dollars, but Roth 401(k)s rely on after-tax contributions, just like they do with IRAs.

This means that you can either choose to pay taxes on your contributions upfront or take a potential tax deduction now and pay them later when you withdraw funds from your retirement account.

You can contribute up to $23,000 in 2024, and individuals age 50 and older can contribute additional "catch-up" contributions of $7,500. The maximum limit for employer and employee contributions is $69,000 in 2024. Therefore, the maximum amount those 50 and older can contribute is $76,500 in 2024.

Many employers also offer a 401(k) match. This means that your company may match a certain percentage of your annual contributions. These matches vary for each employer, ranging from 3% to 6%. For instance, if you make $50,000 per year, and your company matches 50% of your 401(k) contributions up to 5% of your salary, your employer can contribute up to $1,250 a year.

However, if you're employer matched 100% of your contributions up to 5%, you'd earn the other $1,250 a year, resulting in a $2,500 total from your employer. 

No matter how big the match, experts generally consider it to be "free money" and recommend taking advantage wherever possible, even if you only contribute enough to get the full match and nothing more.

Also referred to as tax-sheltered annuities, these retirement plans are typically designated for employees of public schools, 501 (c)(3) tax-exempt organizations, churches, and other non-profit companies. Like 401(k)s, 403(b)s may include employer matches, pre-tax contribution options, and after-tax (Roth) contribution options.

If you're under 50, you can contribute up to $23,000 in 2024. Those aged 50 and above can contribute an additional $7,500.

In addition to pre-tax and after-tax contributions, you can also contribute to your 403(b) by allowing your employer to withhold money from your paycheck to deposit into the account.

State and local governments and certain tax-exempt organizations can open 457(b)s for their employees. As 403(b)s, you can also contribute to these accounts by asking your employer to set aside portions of your paychecks for your retirement plan. And in some cases, employers may allow you to make Roth — or after-tax — contributions. 

Like 401(k)s and 403(b)s, the catch-up contribution limit is $7,500.

Thrift Savings Plans

Thrift savings plans (TSPs) are retirement accounts for federal and uniformed services employees. Like 401(k)s, these plans let you contribute either pre- or post-tax dollars. But, unlike many 401(k) employer matches, most TSPs offer a full 5% contribution match. This means your employer will match your contributions up to 5% of your salary.

The annual contribution limit for 2024 is 23,000. The catch-up contribution limit is $7,500. You can make up to $69,000 in 2024.

Best Retirement Plans For Self-Employed Individuals and Small Businesses

If you're self-employed or a business owner with fewer than 100 employees, you'll have multiple retirement savings plans to choose from. Each plan has unique contribution limits and eligibility requirements. Take a closer look at your options below.

Solo 401(k)s

Solo 401(k)s are an option for self-employed individuals or business owners without full-time employees. Self-employed individuals can only contribute in one capacity, but business owners can contribute as both an employer and employee (and spouses of business owners may be able to contribute as well), meaning they can contribute twice as much. You can also make pre- or post-tax (Roth) contributions to your account. 

In 2024, the limit increases to $23,000 with up to $7,500 in catch-up contributions. You can earn up to $69,000 in annual contributions. Those aged 50 or older can contribute $76,500.

Simplified employee pension (SEP) IRAs are retirement vehicles managed by small businesses or self-employed individuals. According to the IRS, employees (including self-employed individuals) are eligible if they meet the following requirements:

• Have reached age 21
• Have worked for the employer in at least three of the last five years
• Received at least $750 in compensation in 2022

SEP IRAs also require that all contributions to the plan are 100% vested. This means that each employee holds immediate and complete ownership over all contributions to their account, including any employer match.

Vesting protects employees against financial loss. For instance, according to the IRS, an employer can forfeit amounts of an employee's account balance that isn't fully vested if that employee hasn't worked more than 500 hours in a year for five years.

You can contribute up to $69,000 or 25% of your employee's compensation in 2024. However, unlike the solo 401(k), you can't make Roth (after-tax) or catch-up contributions.

SIMPLE IRAs are available to self-employed individuals or small businesses with no more than 100 employees. According to the IRS, these retirement plans require employers to match each employee's contributions on a dollar-for-dollar basis up to 3% of the employee's salary.

To qualify, employees (and self-employed individuals) must have made at least $5,000 in the last two years and expect to receive that same amount during the current year. But once you meet this requirement, you'll be 100% vested in all your SIMPLE IRA's earnings, meaning you have immediate ownership over both your and your employer's contributions. 

Unlike other retirement plans, SIMPLE IRAs and SEP IRAs give you total control over your retirement account. If you work for a small business that offers either of these plans, this prevents your employer from taking back its contributions or an employer match in the event of your leave or termination.

Employees can contribute up to $16,000 in 2024. You can also add on a catch-up contribution of $3,500 if you're 50 or older.

Payroll Deduction IRAs

There's an even simpler way for small businesses to set up IRAs for employees. With payroll deduction IRAs, businesses delegate most of the hard work to banks, insurance companies, and other financial institutions. Self-employed people can also set up these retirement accounts.

In other words, employees can set up payroll deductions with those institutions to fund their IRAs. But you'll first need to consult your employer to determine which institutions it has partnered with. These accounts are generally best for employees who don't have access to other employer-sponsored retirement plans like 401(k)s and 457(b)s.

For 2024, you can contribute up to $7,000 in annual contributions and up to $1,000 in annual catch-up contributions for employees aged 50 or older. This means you can set aside up to $8,000 if you're at least 50 years old. 

Retirement Plans — Frequently Asked Questions (FAQs)

Individual retirement accounts (IRAs) are better retirement plans than a 401(k) for people looking for lower account fees, more investment options, and increased flexibility. If you don't have access to an employer-sponsored 401(k) or similar plan, then an IRA may be a good option. 

IRAs and employer-sponsored retirement plans like 401(k) plans and 403(b)s are the best ways to save for retirement. The best retirement plan for you depends on the kind of tax advantages you're looking for (pre-tax benefits or after-tax benefits) and whether or not you have access to an employer-sponsored plan with matching benefits. 

$200 a month can be a good amount to contribute toward your retirement, depending on your current age and how long you have until you reach retirement age. You may not be able to contribute much, but contributing a little toward retirement is better than not contributing at all due to compound interest. 

Why You Should Trust Us: Our Expert Panel For The Best Retirement Plans

We interviewed the following investing experts to see what they had to say about retirement savings plans. 

• Sandra Cho , RIA, wealth manager, and CEO of Pointwealth Capital Management
• Tessa Campbell , Investment and retirement reporter at Personal Finance Insider

What are the advantages/disadvantages of investing in a retirement plan?

Sandra Cho:

"The main advantage is the tax implications of the account. Depending on the account, taxes will either be deferred or not included at all. For employer-sponsored retirement plans like 401(k)s, contributions to the plan are made with pre-tax funds, and the account grows tax-deferred. Taxes are then owed upon withdrawal.

"Roth IRAs, on the other hand, are contributed to with post-tax funds but grow tax-free. Both should be included in an investor's portfolio. Another advantage is that 401(k)s often have an employer matching component. That is, an employer will match your contributions up to a certain point (usually around 3% of your salary). 

"The disadvantage is that retirement accounts have a max contribution limit. Another disadvantage is that these funds cannot be used until age 59 1/2. For younger investors, that can be a long time wait."

Tessa Campbell: 

"Tax benefits and compound interest are two of the major advantages of contribution to a retirement savings plan like a 401(k) or individual IRA. Depending on the kind of plan you open (traditional or Roth), you can benefit from contributions after- or post-tax dollars. In addition, some 401(k) plans are eligible for employer-sponsored matches, which are essentially free money.

"The disadvantage of a retirement plan is that you won't be able to access the funds in your account penalty-free until you're at least 59 1/2 years old. Unless there are no other options, early withdraws from a retirement savings plan isn't advised."

Who should consider opening a retirement plan?

"Every individual should be investing through a retirement plan if they have the financial capability to. At the minimum, investors should try to contribute up to the matching amount for their 401(k) and the maximum amount for their Roth IRA. The growth in these funds compounds over time, helping to enhance the long-term return."

Tessa Campbell:

"I can't think of a single person that wouldn't benefit from a retirement savings plan, other than maybe someone that is already well into retirement. Although some younger individuals don't feel the need to start contributing quite yet, it's actually better to open an account as soon as possible and take advantage of compound interest growth capabilities."

Is there any advice you'd offer someone who's considering opening a retirement plan?

"I would advise them to work with a financial advisor or trusted professional. This will give them insight into where they should be investing their money, whether that be a 401(k), Roth IRA, or another vehicle. There are plenty of people and sources out there who provide important information and can help you create a strong financial future."

"Don't contribute huge portions of your salary if it doesn't make sense with your budget. While contributing to a retirement savings plan is important, you must still afford your monthly expenses and pay down an existing debt. If you're having trouble establishing a reasonable budget, consult a financial advisor or planner for professional help."

Which Retirement Plan is Best For You?

If you're not a small-business owner or self-employed individual, the best retirement plan for you usually depends on your type of employer, marital status, and short- and long-term savings goals. If you're employed, you'll still only have so much control since your employer determines which types of plans you can open.

However, for most employer-sponsored retirement accounts, you can decide whether to make pre-tax or post-tax (Roth) contributions to your account. Roth contributions are best for those who expect to pay more in taxes as they age, but you should consider pre-tax contributions if you don't mind paying taxes when you withdraw money from your account in retirement.

You can boost your retirement savings even more by opening a separate IRA in addition to your employer-sponsored plan (you can still save toward retirement with an IRA if you're unemployed).

Self-employed individuals and small business owners also have a range of options. Solo 401(k)s and SEP IRAs are best for self-employed individuals and small businesses looking to maximize their annual retirement savings (you can make up to $66,000 in total annual contributions or $69,000 in 2024, excluding the catch-up contribution). SIMPLE IRAs and payroll deduction IRAs are better options for small businesses that don't mind offering employees smaller annual contribution limits.

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