When it comes to investing, the sooner you start, the better your results. If you,
- Take a $1,000 initial investment
- Make an average contribution of to the principal of $200 per month
- Contribute over 45 years (age 22 to 67)
- Earn a 7% annual return compounded annually
- Results in a nest egg of over $700K
By contrast, the outcome of 30 years of saving with the same amounts and returns is only $234,000. Getting started early gains you almost $500K. Many people now turn to robo-advisors to build a portfolio.
What a Robo-Advisor Is
If you’re new to investing, you might not have heard about robo-advisors. They are digital platforms that provide financial planning services that you used to get exclusively from a human advisor. You complete a survey and the robo-advisor makes recommendations or even invests your money based on the results.
Robo-advisors are now a $43B, fast-growing part of the financial services industry. Some are adding humans as back-up advisors. Two of the best known are Betterment and Acorns.
Betterment- The Standard-Bearer
Betterment is a pioneer in the robo-advisor space. There is no account minimum for a basic digital plan, and the annual fee is a low .25%. These low upfront and continuing costs make this option good for people new to investing.
Betterment offers stock and bond ETFs. The stock ETFs range from funds that cover the total U.S. stock market to high-risk emerging market stocks. Bond ETFs range from low-risk treasuries to municipal and corporate bonds all the way to emerging market bonds.
In regards to retirement savings, Betterment offers many services to its investors. You can set up a traditional IRA, a Roth IRA, and/or a taxable retirement account. It also helps you rollover an old 401K to an IRA.
Betterment’s New Human Touch
Betterment now offers customers the ability to connect with licensed human financial advisors. Now you can speak with a person if you want additional feedback on how to meet your financial goals. It is also a member of FINRA (Financial Industry Regulatory Authority, Inc.) and is regulated by the SEC (Securities and Exchange Commission) so Betterment is accountable to the same laws and regulations as a traditional financial services company.
Reducing Taxes & Premium for Large Investors
Betterment works with customers to lower their tax bills too. It offers a ‘Tax-Coordinated Portfolio’ that allocates your highest taxed assets in an IRA and your lowest taxed assets in a taxable account to decrease your taxes. Betterment also has a tax loss harvesting feature so if you have a loss, you can take advantage of the laws to reduce your taxes.
If you build your Betterment balance up to $100,000, you can select the premium service. You get more detailed financial advice. You can even ask a CFP (Certified Financial Planner) for help with outside investments and guidance on setting up college savings plans for children. Betterment puts no limits on advisor access for Premium members.
Betterment for Business
In addition to individual and premium services, there is Betterment for Business. Betterment offers 401K services from plan design to compliance testing. If you have a great experience with Betterment as an investor, you need to review Betterment 401K options for your business.
Betterment uses six different asset classes of stocks and six different asset classes of bonds to build its portfolios. It also applies the tax saving asset location strategy to its business products. Fees are transparent with Betterment, and you can easily identify advisory, recordkeeping, and compliance fee on the website.
Betterment offers a strong array of services. It offers IRAs (traditional, Roth, and SEP) and helps customers rollover old 401Ks. You can start a taxable account too. If you own a business, you can set up a 401K plan with Betterment.
The .25% fee for its digital plan is quite low. It also advertises no fees for rebalancing, no additional transfer fees, and no added trading fees. Along with tax-saving strategies, it is easy to see how you can keep more of your gains with Betterment.
Acorns- The Basics of Microsavings
Acorns is another robo-advisor that helps you get started investing with a modest amount of money. You can connect one or more debit or credit cards that you use to make purchases to your Acorns account. Acorns rounds up your purchases and invests the spare change. For instance, if you buy $25.55 worth of gas, it will show up as a $26 purchase and Acorns will invest the $.45.
Acorns also partners with certain brands so that when you spend with them, they contribute to your Acorns account. Apple, Dollar Shave Club, Macy’s, and Walmart are a few of the participating brands. Check the Acorns site to see if you can gain new money for investing.
Portfolio Choices and Asset Classes
You choose from 5 different portfolios that range from Conservative to Aggressive. A portfolio might have large company stocks, small company stocks, real estate stocks, international large company stocks, emerging market stocks, corporate bonds, and/or government bonds. The most conservative portfolio has a higher percentage of corporate and government bonds while different types of stocks comprise the most aggressive one.
There are no retirement accounts listed on the Acorns website. The absence of traditional and Roth IRAs means that you do not have retirement accounts with tax benefits. Acorns notes that its ETFs come from well-regarded companies such as Blackrock, Pimco, and Vanguard.
Acorns charges $1 per month in fees if your balance is under $5,000. This structure means if you invest $100 per month, you pay 1% in fees. The annual fee is .25% once you reach $5,000.
Acorns advertises that it is free for college students for up to four years provided they have a legitimate .edu address. You can start saving in college, build up an account, and qualify for the lower fee structure once you graduate if you have $5,000.
Acorns Advisors, LLC is an SEC Registered Investment Advisor and it runs the Acorns website. It is also a member of FINRA just like competitor Betterment and other financial services companies.
Acorns is not entirely automated. You can call with questions Monday-Friday from 6am-5pm PST.
Pluses & Minuses of Acorns
The Acorns site provides straightforward definitions of financial terms such as stocks, bonds, and portfolio. It also gives you a good breakdown of its portfolios. A novice investor quickly realizes that bonds are for more conservative investors and stocks are for people with more risk tolerance.
Setting aside a little bit of money with each purchase is a good way to start saving. The Acorns app is a popular way to begin investing.
The $1 per month fee when you start can be higher than you think. For instance, if you only invest $50 in a month, the $1 fee equals 2% of your investment. College students get some fee relief; however, Acorns only advertises this break for college students, not young investors in general.
Passive Investment Strategy
Betterment and Acorns use a passive strategy for investing. They provide services such as rebalancing, but Betterment and Acorns do not try to pick certain individual stocks or time the market. Their appeal is that they put you in a diversified portfolio that generates average returns market returns for low fees. This approach frees you up to focus on building a career, not worrying about investments.
Robo-advisors take software that was previously only available to financial planners and apply it to the public. Both Acorns and Betterment advertise that they rebalance portfolios. Rebalancing is when you change the allocation of assets (i.e. you might change a portfolio from 70/30 stocks and bonds to a 50/50 split between stocks and bonds to make it more conservative).
Investing vs Banking Protections
Both Betterment and Acorns are members of SIPC (Securities Investor Protection Corporation). Keep in mind, SIPC is not equivalent to the FDIC. The FDIC protects your cash in certain types of accounts up to $250,000. For example, if you have $200,000 in a deposit account at a bank that fails, the FDIC insures that money.
SIPC is different. SIPC does not protect the value of your securities. If a brokerage firm liquidates, SIPC makes sure that the securities and cash that are supposed to be in your account are there.
A Robo-Advisor Future
Robo-advisors automated portfolio management. Some such as Betterment added tax saving strategies. These services were once only done by people in financial planning.
Money managers charged a 1-2% fee for services. That means a fair amount of your gains went to fees. With smaller fees, a robo-advisor allows you to keep more of your gains.
Traditional financial planners often required substantial minimum deposits. Robo-advisors enable people starting literally with no savings to build a portfolio of stocks and/or bonds. With savings and money market accounts only earning 1.35% APR in the best circumstances, services such as Betterment and Acorns allow you access to more lucrative investments.