First, what is a brokerage account?
A brokerage account is a type of taxable account you open with a stock brokerage firm as a way to invest your money in the stock market. You deposit cash into the account and then decide how you want to invest the money.
With a full-service brokerage account, you work with a dedicated broker and the costs are much higher for you as an investor. With a discount broker, everything is pretty much done online these days and you pay much lower fees since it’s a more of a do-it-yourself approach.
A discount broker is a great option for investors who don’t want to pay big fees. While these brokerages typically don’t offer direct investment advice, they do provide investors with research and tools in order to help you make better investing decisions.
When it comes to choosing a discount broker, there are a few things to consider. Some offer better tools, but may charge higher fees. Others may only provide you with the basics, but charge lower fees. Each broker may also have a different minimum opening balance requirement – the minimum amount you need to open an account. Some require as little as nothing, while other minimums can require up to $1,000 to get started.
For many years, the Big Three discount investing houses — Fidelity, Schwab and Vanguard — operated on a simple full service vs. self service model. You could either pay them to handle your investments or you could do it yourself. But now most of those companies offer a new and wholly different level of service.
What are robo-advisors?
Robo-advisors are a relatively new breed of investment advisor. The way it works is they use automated computer algorithms and model portfolios to select and balance investments based on certain information provided by the investor.
In order to match your personal situation, the robo-advisor will take into consideration things like your age, income, current savings, risk tolerance and goals. So all you have to do is answer a few questions and the service creates an investment portfolio designed specifically for you.
Keeping costs low is a key objective of these investment accounts, so they commonly use low-fee exchange-traded funds to build portfolios. Many firms charge a management fee of between 0.25% and a little less than 1% a year, either based on the amount you invest or some charge a flat annual fee.
Since the model is primarily focused on low costs and convenience, many robo-advisors offer minimal human interaction — so the service is more about simply allocating your investments, rather than financial planning.
But each robo-advisor is different. While some are fully automated (offering minimal human interaction), there are others that provide you with the option of talking to a professional on the phone or online if you need advice — for example, if you need help creating a plan to reach certain financial goals.
When it comes to choosing the right one for you, it’s important to think about you want to get out of the service. Are you just looking for an easy way to invest or are you also looking for some help along the way?
Choosing the right robo-advisor for you
As the industry continues to expand, it’s important to understand the differences between all of the services out there in order to choose the best one for you and your needs. Here are some of the best options to consider.
Wealthfront was recently ranked by NerdWallet as one of the top robo-advisors out there. Wealthfront is the world’s largest automated investment service with over $1 billion in client assets. It’s fully automated and has a low account minimum, as well as an easy-to-use interface and innovative features. Since it is fully automated, there’s little human interaction.
But in terms of fees, Wealthfront does not charge an advisory fee on the first $10,000 you invest. On amounts over $10,000, Wealthfront charges a monthly advisory fee based on an annual fee rate of 0.25%. The only other fee incurred is the one embedded in the costs of the ETFs (exchange traded funds) that a client owns as part of their portfolio — which averages about 0.15%. The minimum investment is $5,000.
Betterment was also ranked by NerdWallet as a top choice since it also has a low account minimum, along with an easy-to-use interface and innovative features. Betterment is also a fully automated investment service with very little human interaction. Like Wealthfront, Betterment starts the process by asking you a series of questions and then recommends an investment plan based on your situation. Betterment charges a maximum 0.35% monthly portfolio fee which decreases as balances grow. Plus, there is no minimum investment.
WiseBanyan & Charles Schwab
Earning four stars in NerdWallet’s ratings are WiseBanyan and Charles Schwab, two services that charge $0 in management fees.
WiseBanyan manages your investments for free, but does charge for additional services. So it’s important to consider the potential cost of these paid add-ons that you might want or need. You only need $10 to open an account and there’s no minimum account balance required. Just like with most robo-advisors, you do have to pay any fees associated with funds you’re invested in.
Charles Schwab also manages your investments for free and helps you set, track and work toward your savings and income goals. The service provides professional help 24/7 and the minimum amount required to open an account is $5,000.
Learnvest is an online advisor that doesn’t manage investments but offers clients a fully-customized financial plan to help you balance needs and wants in order to reach your goals. With Learnvest, you get access to a Certified Financial Planner via phone or email, as well as online tools and classes to help you make better financial decisions. Learnvest charges a one-time set up fee of $299, plus a $19 monthly fee. Check out the website for more detailed pricing and available options.
Vanguard & Personal Capital
NerdWallet rated these two companies as the best options for access to a financial planner. These services are geared toward investors who are looking for low management fees but also want more human involvement. Both models are based on a combination of computer automated investing and dedicated financial advisors, and both offer free financial advice to all of their clients.
They also require much higher account minimums. Vanguard requires a minimum $50,000 investment and Personal Capital requires $25,000. When it comes to management fees, Vanguard charges 0.30%, while Personal Capital’s fee is based on account balance — ranging from 0.49% to 0.89%.
When trying to determine which investment service is best for you, start by figuring out what your must-have features are. If you aren’t comfortable with a fully-automated service and want more help in making big financial decisions, you may want to consider a company that offers those added services.
But note this well: Later in life, there’s no substitute for a well trained and educated human being like a fee-only financial planner. Such a person can be invaluable for guiding you when you’ve built up a pile of money and it’s getting closer to when you’re going to spend it.