Brokerages and Robo-advisors

August 30th, 2018

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So you’re ready to start investing. Way to go! We’re here to help.
 
If you haven’t reviewed our Investing Cheat Sheet yet, we suggest you do. Also, if you want to dig a little deeper into investing and other areas of your financial life, we suggest you take our financial health assessment and check out our core content if you haven’t yet. It will give you a more complete picture of how this all works.
 
But if you’re ready to start investing (or at least want to learn more), lets get to it!
 

What we cover

• Opening an account
• Robo-advisor basics
• Pros and cons of robo-advisors
• Brokerage account basics
• Pros and cons of brokerages
• Brokerages vs robo-advisors
 

Opening an Investment Account

Before you can invest your money in stocks, bonds, and funds, you’ll need to open an investment account.
 
A dedicated retirement account (like a 401(k) through work, or an Individual Retirement Account (IRA) on your own) can be a good place to start. Both of these offer tax benefits that will help your money grow faster, and some employers match a portion of your 401(k) contributions, which is as close to free money as you can get.
 
The downside – these accounts are specifically designed for long-term investing (you generally can’t take the money out before retirement without penalties). So if you’ll be needing the money sooner, you’d be better off with a brokerage account or a robo-advisor account, which is what we’re covering here. With these, you can take your money out whenever you need it.
 

Robo-Advisors

Robo-advisors offer an easy way to get started investing because they choose your investments and manage your portfolio for you for a relatively small fee.
 

How it works

When you sign up with a robo-advisor, they’ll ask you a few questions, like your age and financial goals. Then they’ll use computer algorithms to create a somewhat customized portfolio for you, typically made up of low-cost index funds. Their goal is to offer the best return possible for a given amount of risk, all for a relatively low fee.
 

Comparing offers

The popularity of robo-advisors has grown significantly over the past few years and you can choose from a number of providers. They range from independent startups like Betterment and Wealthfront, to more traditional wealth management companies that now offer robo services.
 
Although the offerings tend to be similar, they do vary somewhat, so pay particular attention to some key differentiators like;
 
• Account minimums: Robo-advisors are intentionally designed to make it easy to get started investing. But some of them do have minimum account balances you’ll need to meet before you can sign up. The good news, there’s always an option for you no matter how much you have.
 
• Management fees: While robo-advisors do simplify the investing process, they don’t do it for free. You’ll have to pay an annual management fee, represented as a percentage of your assets under management. And this fee is on top of the management fees charged by the funds your robo-advisor invests your money in. So in effect, you’ll have two layers of fees. Even still, the total cost is relatively low.
 
• Additional services: The point of robo-advisors is to utilize computers to reduce management costs, but some also offer additional services, like the ability to speak with a human financial advisor. Pay attention to what’s offered as you shop around, and realize they likely charge more for these services.
 
To help your search, we’ve compiled a list of five of the most popular robo-advisors currently available. If you’re interested in learning more about one, click on the Open Account link in the table, which will take you to their secure website.
 

Robo-AdvisorManagement FeeAccount MinimumStart Investing
0.25% of account balance$0Open Account
0.25% of account balance$500Open Account
Free$5,000Open Account
0.3% of account balance$50,000Open Account
0.49 - 0.89% of account balance$100,000Open Account

Pros of using a robo-advisor

• Easy way for beginners to start investing

• Automatically manages your money for you

• Relatively inexpensive compared to financial professionals
 

Cons of using a robo-advisor

• Limited flexibility in terms of investment choice

• Not ideal for dealing with unique personal circumstances

• More expensive than investing on your own with a brokerage account

 

Brokerage Accounts

If you want to be more hands on in choosing and managing your investments, you could save some money by going with a brokerage account instead.
 

How it works

Brokerage accounts are the most basic type of taxable investment account. While robo-advisors pick your investments for you, with a brokerage account, it will be up to you to select your investments. You’ll be able to choose from a much wider range of stocks, bonds, funds, and other financial securities that robo-advisors don’t typically offer.
 

Comparing offers

Chances are, any number of brokerages could cover your specific needs. But they do vary with respect to what they charge and what they offer. In particular, pay attention to;
 
• Trading commissions: Every time you make a trade (buy or sell an investment), you’ll be charged a trading commission. For the most part, brokerages are fairly competitive with how much they charge (typically around $5-$7 per trade), but you should pay attention to these and any other fees. In general though, it’s best to invest for the long term. So you don’t want to be overly active in trading your portfolio anyway.
 
• Account minimums: While some brokerages do have minimum balance requirements, this has become less relevant over time (most have low or no minimums). You’ll be able to choose from multiple brokerages regardless of how much you have to invest.
 
• Additional services: While the core function of a brokerage account is to serve as a way to buy and sell investments, most have additional services, like financial research, tax support, and the ability to work with a professional. However, some of these services may cost extra, so be sure you know what they cost before singing up.
 
We’ve made a list of five of the most popular brokerages and have included trading commissions and account minimums for each. If you’re interested in learning more, click on the Open Account link in the table and it will take you to their secure website.
 

BrokerCommissions Account MinimumStart Investing
$0 per trade$0Open Account
$0 per trade$0Open Account
$0 per trade$0Open Account
$0 per trade$0Open Account
$0 per trade$500Open Account

Pros of using a brokerage

• Wider range of investment choices to choose from

• Less expensive than robo-advisors because you don’t pay a portfolio management fee
 

Cons of using a brokerage

• Deciding what investments to buy can be overwhelming, especially for new investors

• Managing your portfolio requires some time and effort

 

The line is blurring between brokerages, robo-advisors, and investment advisors

Some robo-advisors have started to offer the ability to work with a financial professional and some traditional brokerage providers and wealth management firms have started to offer robo-advisor services. Simply put, the line between them has begun to blur.
 
When you’re thinking about which provider (or providers) might be best for you, consider your specific needs, what services they offer, and how much they charge for those services. Also, be prepared for the up-sell to additional services after you sign up. These aren’t necessarily a bad idea, but you’ll want to understand exactly what’s being offered and the cost.
 
For example, if someone at your brokerage recommends particular investments to you, make sure you understand why they’re recommending them, how that person is compensated, and what fees are associated with the investments. It’s important to make sure your incentives are aligned.
 

Summary

Investing your money is an important step in growing and maintaining your wealth. And while dedicated retirement accounts like 401(k)s and IRAs offer some attractive benefits for your retirement savings, brokerages and robo-advisors offer an alternative that allows you to access your money whenever you need it. So be kind to your future self and start investing today!

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