Best Robo-Advisor IRAs

What is a Robo-Advisor?

A robo-advisor is a service that offers automated investment advice and investment management based on custom software and algorithms.

Customers typically complete surveys before using the service to establish their goals, risk tolerance, and time frames.

After using its own software to determine the proper asset allocation, the company will advise clients when and how much to contribute in order to reach their objectives, depending on the investment service.

Certain providers might follow slightly different methodologies. Investing platform Acorns, for example, allows you to put away tiny amounts into investment portfolios using fractional shares.

Once the robo-advisor has funds under management, they typically employ an automated procedure on a regular basis to rebalance the portfolio to match specified performance parameters and maybe engage in some tax-loss harvesting.

Because it takes more time and each rebalancing results in transaction costs, rebalancing performed by a human advisor is substantially more expensive.

Robo-advisors use inexpensive, automated technology to rebalance investments and capture tax losses. This is an appealing hands-off option for investors looking to minimize their day-to-day involvement with their investments.

What should you look for when choosing a Robo-Advisor?

When choosing a robo-investment advisor, there are several key considerations:

• Ease of Use: Your experience with the robo-advisor should be straightforward. It should be simple to link your checking account and begin investing in brokerage accounts with your robo-advisor. The investing platform should be intuitive and user-friendly.

• Costs and Fees: Almost all robo-advisors offer similar low-cost ETFs, leading to similar performance. Therefore, the distinguishing factor becomes the cost, including annual advisory fees and ETF expense ratios. You should look for a robo-advisor that combines a high level of usability with reasonable fees.
• Investment Strategy and Portfolio Diversification: It’s essential to consider how a robo-advisor constructs its portfolio options. Typically, they offer diversified portfolios of low-cost ETFs (and sometimes mutual funds). Make sure their investment strategy aligns with your goals and risk tolerance.
  • Certain robo-advisors may offer access to crypto (cryptocurrency), but not all do. If this is something you’re interested in, be sure to do some digging before settling on a provider.
• Portfolio Management Practices: Be cautious of robo-advisors that claim to have zero management fees. Some may keep a large part of your balance uninvested in a cash account, which they lend out to earn interest. This can reduce your overall returns because a portion of your investment remains idle.
• Customer Support: While robo-advisors operate mostly on automation, reliable customer support is still vital for addressing any issues or queries. Many people value an interactive experience when it comes to their investments, even if the robo-advisory firm is doing the heavy lifting.
• Reputation and Security: Lastly, look at the robo-advisor’s reputation, as well as the security measures they have in place to protect your investments and personal data.

In essence, the ideal robo-advisor should align with your financial goals, investment style, and risk tolerance, all while offering a simple user interface, reasonable fees, and robust customer support.

Some robo-advisors have adopted a wealth management approach, rather than a pure investment management approach since their offerings have grown in popularity and they are attracting a more affluent client overall. Many robo-advisors offer a diverse menu of savings accounts and brokerage accounts, though credit cards are uncommon.

What’s an automated IRA?

An “automated” or “digitally managed” IRA uses technology to select the right investments for you and digitally rebalances them over time.

A key advantage of these automated IRAs is that they make investing decisions for you.

This makes them a good fit for people who want to outsource their investing decisions or don’t feel qualified to make their own trades. By using technology to pick stock market investments (and not humans), these automated IRAs are available at low-fees and can efficiently manage (collectively) billions of dollars in assets.

Robo-advisor services include automatic asset allocation, portfolio rebalancing and tax optimization. Many provide access to traditional financial advisors to help clients with investment and/or retirement planning, and most have a solid library of educational resources if you want to go at it alone.

They’re offered both by younger, ‘fintech’ companies and more established financial institutions. Some institutions even offer thematic asset allocation plans, like socially responsible investing options or diversified crypto plans.

Note that apart from FDIC-insured deposits, investments in an automated IRA are at-risk.

How do automated IRAs work?

Most automated IRAs involve a similar process:

1. You open an account with one of these companies online – this usually takes minutes.
2. You answer 5-10 questions about yourself, usually including your age, net worth, and attitude towards risk (this is often known as a “risk tolerance questionnaire”).
3. They use this information to propose a diversified portfolio for you. That portfolio usually contains low-cost Exchange Traded Funds from providers like Vanguard, BlackRock, and iShares.
4. These ETFs are a low-cost way to get access to specific asset classes in the form of index funds. These ETFs track broad markets like US and international stocks, emerging market stocks, and bonds.
   • Your specific mix of ETFs depends on what your ‘risk level’ appears to be. Generally, a higher risk tolerance will mean more stocks (equities) and a lower one will mean more bonds (fixed income).
5. You fund your account, in this case by transferring the assets previously part of your 401(k) account balance.
6. Once your account is funded the IRA provider will purchase the right investments to create your portfolio.
7. They monitor your portfolio over time and automatically rebalance it so it remains appropriately diversified.

Can you have a Robo-Roth IRA?

Yes, you certainly can have a robo-advisor manage a Roth IRA account.

Many robo-advisors support a variety of account types, including traditional IRA, Roth IRA, SEP IRA, and even taxable accounts.

A Roth IRA is a type of individual retirement account where you make contributions with after-tax money. The key benefit is that all future withdrawals are tax-free in retirement, given certain conditions are met.

When you open a Roth IRA with a robo-advisor, they will manage your investments within that investment account using their algorithmic strategies. This typically involves assessing your risk tolerance, investment timeline, and financial goals to determine an appropriate portfolio of investments, often consisting of a diversified mix of low-cost exchange-traded funds (ETFs).

The robo-advisor will then handle the ongoing maintenance of the account, such as rebalancing the portfolio to maintain your target asset allocation.

Before deciding on a robo-advisor for your new Roth IRA account or rollover, consider factors like fees, investment options, and the availability of human advisors for consultation, to ensure it’s the right fit for your individual needs and investing goals.