The Rise of the RoboInvestors
Many argue that investing in the stock market is still the best way to get ahead of inflation and increase wealth in the long term. It is widely accepted that you can expect a 7% return from the stock market in the long term. However, this 7% return does not apply if you are only invested in the stock of one (or a few companies). Instead, it takes into account the total stock market index, using an index fund like the Standard & Poor’s 500 (S&P 500) or the Dow Jones Industrial Average (DOW). These funds take into account the U.S stock market as a whole.
People are often confused and fear the stock market - mainly because of the “sky-is-falling” type of news reporting they see in the media everyday. The problem is, none of it matters in the long term, we’ve had 2 huge crashes in the last 20 years, the dot-com crash in the early 2000’s and the housing market crash in 2008 - both times the market recovered and if you look at the average return for the S&P 500 over the last 25 years - it’s still just over 7% after inflation.
It still stands that investing in the stock marketing is the best way to become wealthy over the long term thanks to the power of compound interest. Historically, this meant that you either spoke to a financial advisor, who cost a lot of money and ate into your returns OR you tried to do it yourself. Now, there is a third option - automated investing. These “robo-advisor” firms are popping up all over the web and some of them are gaining a solid reputation.
The two most reputable robo-advisors at this moment are Betterment and WealthFront. There are other contenders in the space, like LearnVest, FutureAdvisor and SigFig, but Betterment and WealthFront’s algorithms seem to be more refined and curated. To give you a brief overview of the two chosen, both companies will manage your investments using their own algorithms and software to give you the advantages of a professional money management services but without the huge fees.
Betterment
Betterment is a New York based company and is managing over $1 billion. Their fee is structured in three tiers which charge you fees based on the amount of money you invest with them. The fees are 0.35% of average balance (with $100/mth direct deposit) or $3/mth, for balances under $100, 0.25% of average balance for investments over $10,000 and just 0.15% for an investment of $100,000 and more.
WealthFront
WealthFront is based in California and became the first robo-investor company to reach $1 billion in assets under management. They have a simpler fee structure that charges you a flat 0.25% no matter how much you have invested. They also manage your first $10,000 in your account for free.
Both companies offer several different types of accounts like traditional and Roth IRA’s, taxable accounts, trusts and the ability to rollover your IRA’s. WealthFront also offers SEP IRA’s and non-profit accounts on top of the others. Further, both companies also offer tax-loss harvesting and automatically rebalance your portfolio.
Looking at the companies, they both offer most of the same benefits but a few stand out for each of them as well. WealthFront might be the choice if you are just starting out and have less than $10,000 to invest since they charge no fees for the first $10,000. WealthFront also gives you the option to get an additional $5,000 in free management for every referral you can get to sign up.
Betterment is better if you have close to, or over $100,000 to invest. Their 0.15% fee is one of lowest in the industry and very hard to beat. Betterment also allows you to set individual investment goals via their dashboard and mobile phone app, like investing for a college fund or retirement.
Overall, both Betterment and WealthFront have a lot to offer for novice investors and is great for people who want to set their retirement investment to “set it and forget it” mode. Both companies charge far lesser fees than any comparable financial advisor and you can’t really go wrong with either option.