Related: 10 Best Robo-Advisors: Q4 2021
Morningstar recently published its first Robo-Advisor Landscape report, examining the current digital advice landscape in the U.S. by evaluating 16 robo-advisors based in this country.
The research found broad similarities among major retail-oriented U.S. digital advice providers in investor engagement and advice delivery. Most start with a basic questionnaire geared toward understanding investors’ goals, time horizons and risk tolerance.
The advice engine uses that information to pair investors with one of several portfolio options, typically consisting of low-cost, passively managed funds.
Differences among robo-advisors crop up more in how much they help with other aspects of financial planning. Most focus on digital investment management and add some basic features, but the best ones offer more comprehensive planning tools, ranging from online-only counsel to on-demand access to human financial advisors.
Cost is another key differentiator. The median advisory fee among robo-advisors Morningstar surveyed was 0.30% of assets per year, which means they are significantly cheaper than traditional financial advisors’ typical 1% levy.
But specific fee levels and how they are charged vary. The optimal fee structure depends on how much money clients invest and whether they want basic investment advice or more comprehensive financial planning.
“Digital investment advice can be a good option for smaller investors who may not be able to afford a traditional financial advisor,” Amy Arnott, portfolio strategist at Morningstar and lead author of the report, said in a statement.
“However, there is work to be done on the level of transparency, higher fees in some cases and financial planning tools that support investors with varied investing goals.”
In its robo-advisor assessments, Morningstar looked for low, transparent fees; a robust risk tolerance questionnaire; logical mapping to portfolios; sound portfolio diversification that steers clear of questionable asset classes and investment tactics; and a broad range of planning-related features.
Analysts scored robo-advisors on a five-point scale, high (5), above average (4), average (3), below average (2) and low (1), along the dimensions of total price — the higher the score, the more attractive the fees (30% weighting); process used to select investments, construct portfolios and match portfolios with investors (30%); parent organization behind the digital platform (20%); and breadth of services (20%).
They then weighted each category score, and summed it to arrive at an overall score, which was then used to rank the robo-advisors.
See the gallery for assessments of 16 robo-advisors.