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How to Choose a Robo-Advisor

Here's what you need to ask before diving into the robo-advice pool.

By Michael Schramm

Robo-advisors have become an increasingly popular option for investors during the past several years. Total robo-advisor assets under management in the United States top $75 billion, according to an estimate from Statista. In a nutshell, the robo-advice engine asks the investor to answer a handful of questions about his investment needs, and an algorithm churns out a recommended investment portfolio.

If you're thinking about getting some robo-advice, here's what to consider, as well as a broad view of some of the leading providers.

Considerations
Given passive investment's emphasis on low fees, investors considering robo-advice should pay close attention to what a service costs.

"Investors should pay attention to any costs they're paying for advice in total: So not just for the investment management fees related to the product, but also whatever they're paying advisors," says Christine Benz, Morningstar's director of personal finance. In other words, don't just know what the robo-advisor will charge you; also consider the annual expense ratios that funds charge, along with related trading costs.

Investors should also weigh whether they want a hybrid robo-advisor service. Such services offer a level of personalization by balancing robo-advisor recommendations with occasional checks with human advisors. The personal touch can help investors with special circumstances--but it comes at an extra cost.

For instance, Schwab's Intelligent Advisory is a hybrid model with scheduled human checks. This service requires a 0.28% advisory fee and a $25,000 account minimum. Contrast this with Schwab Intelligent Portfolios, which provides a customer service line instead of scheduled human checks. Less human interaction means fewer fees and minimums: The latter service charges no advisory fees and requires a $5,000 account minimum.

Speaking of minimums, you'll need to know how much you'll commit initially. Robos generally require lower minimum investment requirements than human advisors do, but some minimums--like Vanguard's $50,000 requirement--might be steep for newer investors. Fidelity Go has a $5,000 minimum while Wealthfront charges a $500 minimum. Other robo-advisors, such as Betterment, have no account minimums.

Comparing Popular Services
Here's a sampling of some of the most popular services today.

Vanguard Personal Advisor Services currently has the most assets under management (more than $65 billion) for a robo-advisory service. The service is a hybrid model that pairs you with an advisor. These advisors help construct a low-cost portfolio of funds, serve as investing coaches whenever you need help sticking with your plan, and help minimize taxes paid. The service charges a 0.3% annual management fee and requires a $50,000 account minimum to get started.

Another hybrid robo-advisor service is Fidelity Go, which specializes in revealing all costs you'll pay before investing. The service provides users total cost--the 0.35% annual fee and expense ratios of underlying funds, for instance--after selecting an ideal investment strategy. When the strategy's unknown, the system accounts for costs using the highest expense ratio of all Fidelity Go strategies. Fidelity also provides users an account balance monthly cost estimate, assuming users have at least the $5,000 minimum balance. After inputting investment information, humans monitor your investments and make changes as necessary for your plan.

Charles Schwab provides two prominent robo-advisory services. The Schwab Intelligent Advisory plan has clients meet with a human advisor for an initial hourlong consultation followed by annual 30-minute checks. This plan charges a 0.28% annual management fee and requires a $25,000 minimum deposit. Schwab Intelligent Portfolios, meanwhile, is an entirely robo model with no management fee and $5,000 account minimum.

Betterment is another popular hybrid robo-advisor service that's new in the financial services industry, launching in 2010. Betterment offers two plans. The first is a digital service with no minimum and 0.25% annual fee that includes trading costs (though users will still pay yearly expense ratios on the underlying funds). Digital users can also message financial advisors questions within the company's app. Users who want unlimited email and phone advisor communication can utilize Betterment's premium service if they have at least $100,000 to invest and are willing to pay an annual 0.4% fee.

Another new hybrid robo-advisory company is Wealthfront, which charges a 0.25% annual advisory fee including any trading costs (but not expense ratios). The service requires a $500 account minimum. One unique advantage Wealthfront offers is path: a personal finance tool where users can see expected retirement income as needs change; you can use the tool to see how a promotion can increase savings, for instance.