If you want to get started investing but have no clue where to start, you’re not alone. One common question many beginner investors have is what’s the difference between a robo-advisor and a discount broker?
While both types of firms allow you to invest money, they focus on very different things. Let’s explore the differences between robo-advisors and discount brokers, and then look at some examples of each.
What is a robo-advisor?
A robo-advisor is an investment firm that manages your money for you on your behalf. They typically help you with investment selection, rebalancing your portfolio on a regular basis and may even try to optimize your returns using methods such as tax harvesting.
These firms usually charge a management fee in addition to any underlying investment fees you’d normally be charged on your investments.
Why they’re perfect for beginners
Beginner investors may like that robo-advisors help deal with some of the complexities of investing that you may not tackle until a few years after you start investing. However, robo-advisors charge for these services that you may not benefit from very much in the first few years you invest.
Even so, the fees robo-advisors charge are typically much lower than a traditional financial advisor would charge.
Low minimum investment requirements
Additionally, many robo-advisors have no or lower minimum investment requirements while financial advisors may have higher initial investment requirements that could scare off beginner investors.
That said, robo-advisors could still charge more than what a brokerage firm would charge if you took care of the robo-advisor functions yourself. Over time, the additional fees could add up to thousands of dollars when you consider the compounding returns you may miss out on.
Who should use a robo-advisor
As you can see from above, robo-advisors are great for beginners, but they’re also great for those who want hands-off investing and/or those with little to invest. Robo-advisors typically have a lower minimum investment than big brokerage firms.
You should also use a robo-advisor if:
You understand and don’t mind paying fees
Again, as we said above, fees are a big concern when considering a robo-advisor. Those fees may be worth it for someone who understands the importance of investing, but doesn’t have the time to (or simply doesn’t want to) pay close attention to what they’re investing in.
That brings us to our next point.
You’re okay with someone else doing ALL of your investing
Robo-advisors offers great peace of mind, because they choose your investments based on what you tell them, and they automatically keep you diversified. This means less risk for you.
What is a discount broker?
A traditional brokerage firm allows you to pick and choose your individual investments. They can hold your money before you decide what to purchase and may charge fees for you to buy and sell investments.
You’re on your own as an investor
These companies do not help you choose what to invest in based on your risk tolerance and won’t automatically rebalance your portfolio for you. Everything is completely up to you at a traditional brokerage firm.
With a traditional broker, you may be charged a fee to purchase or sell certain investments and be able to purchase and sell other investments for free. If you want to rebalance your portfolio or attempt tax harvesting, you’ll have to learn to do it yourself and request the necessary transactions to make it happen.
They typically have minimum investment requirements
Traditional brokers may also have minimum investment requirements to invest in certain mutual funds or other investments. If you don’t have the minimum required amount, they usually offer other investments with a very low or no minimum investment requirement that you can use until you reach the higher minimums of the funds you want to invest in.
Who should use a discount broker
A discount broker is best for the hands-on investor. You can choose the investments you want to make, including socially responsible investments. The broker is there simply to help you.
So, you should only use a discount broker if:
You have a lot of money to invest
Traditional discount brokers typically have a minimum investment balance somewhere in the hundreds of thousands of dollars range. When it comes to that much money, it makes sense to have an actual person handle it.
You don’t want to make online transactions
Some people like to know the person who handles their money—and for good reason. If you’re one of those people, using a robo-advisor makes no sense since everything is conducted online.
Examples of robo-advisors
Robo-advisors are fairly new to the investing world. In fact, the first robo-advisors appeared in 2008. Here are some of the more popular robo-advisors and how they work.
Getting started with Betterment
To get started with Betterment, you’ll tell the robo-advisor a bit about your investing goals. Betterment will then recommend how much you need to save to meet those goals both now and over time.
They’ll also assess your risk tolerance and suggest how much of your investments should be allocated to stocks and bonds. Then, you simply invest and let Betterment take care of purchasing the correct funds and rebalancing using tax-smart technology.
- Digital package—Betterment currently charges an annual management fee of 0.25 percent of your account balance for their Digital package, which has a $0 minimum balance requirement.
- Premium package—Offers in-depth advice on investments outside of your Betterment account and access to a CFP for guidance on life events. The Premium package has an annual management fee of 0.40 percent of your account balance and a $100,000 minimum balance requirement.
Betterment’s simple layout and low minimum account balance make it perfect for investing beginners.
Getting started with Empower
Empower is a robo-advisor that comes with traditional financial advisor advice. Your first step will be registering for a Empower account, then linking your assets so they can see where you’re currently invested.
Next, you’ll talk to a personal advisor that discusses your investing goals, risk tolerance and other big life events to help you decide where to invest. From there, a plan is created and their technology takes charge of making sure you invest in a tax-efficient manner. They’ll also properly rebalance your portfolio as necessary and be available to give investment advice when you need it.
Empower charges you nothing to use their financial tools. However, if you want Empower to manage your investments, they charge a 0.89 percent annual fee on investments up to the first $1,000,000. Empower requires a minimum of a $100,000 investment.
Clients with over $1,000,000 managed by Empower pay a lower fee. Investments within Empower may charge fund fees, too.
Empower is a fantastic robo advisor – perhaps the best on the market – for people with a high net worth.
Getting started with Blooom
When you sign up for a paid account with blooom, you’ll answer a few questions about yourself then link your 401(k) account so Blooom can analyze your account.
Once the analysis is complete, blooom will show you your 401(k)’s health based on your mix of stocks and bonds, your diversification and fees you may be paying. They’ll make suggestions on how to optimize your 401(k), allow you to choose your stock and bond allocation and then make all of the necessary adjustments as long as you remain a paying customer.
Blooom doesn’t charge the typical percentage of assets fee that many other robo-advisors use. Instead, they charge you $10 per month for your first account and $7.50 per month for each additional account.
Blooom’s offering is centered around 401(k) accounts – they’ll help choose your stock/bond allocation, optimize your fund and more. If you’re looking to invest for retirement, go with blooom.
Examples of discount brokers
Discount brokers have been around for centuries to help people buy and sell investments. You’re likely familiar with at least a few brokerages whether you realize it or not. Here are some of the more popular discount brokers and how they work.
J. P. Morgan Self-Directed Investing
Getting started with J.P. Morgan Self-Directed Investing
J. P. Morgan Self-Directed Investing makes setting up your portfolio easy. You’ll have two big choices from the start: J. P. Morgan Self-Directed Investing, which has you setting up and managing your own investments, and J.P. Morgan Automated Investing, which creates an expertly-built portfolio based on your goals and manages it for you.
Once you’ve set up your account, you’ll be walked through the process of building your portfolio. You can see the level of risk and projected reward you’ll get with various choices, based on J.P. Morgan data. You’ll be able to tweak these options at any time, even after you’ve set up your portfolio.
J. P. Morgan Self-Directed Investing’s fees
If you choose the self-directed portfolio option, you’ll pay no advisory fees and have no investment minimums.
The J.P. Morgan Automated Investing option comes with a 0.35% annual advisory fee, which is $0.18 per month on a $500 investment. You will have to come up with at least $500 as an initial investment with this option.
J. P. Morgan Self-Directed Investing is perfect for new investors who want to start slowly. Not only are there no investment minimums, the research-based interface makes it ideal for those who are interested in learning the market.
Investments offered by Vanguard
Vanguard also offers brokerage services. They offer free investing in Vanguard mutual funds and ETFs as long as you meet the fund minimums. This is where Vanguard shines as their ETFs and mutual funds usually offer low cost investing options.
- You can buy stocks and non-Vanguard ETFs for $7 per trade for the first 25 trades and $20 for each additional trade.
- Option trades start at $7 plus $1 per option contract. If you wish to buy a mutual fund that requires a transaction fee, you’ll pay $20 per trade. If you have an account balance of over $50,000, your fees may be lower.
Investments Fidelity offers
Fidelity is another highly respected company that offers brokerage services. They offer:
- US stock and ETF trades for $4.95 and option trades for $4.95 plus $0.65 per contract.
- Certain fee-free ETFs and mutual funds. However, if you want to purchase a different mutual fund, there is a $49.95 fee to purchase the fund and no fee for redemption.
Fidelity also offers a digital advisory service for an annual fee of 0.35 percent. Based on answering a few questions, Fidelity will suggest an investment strategy and manage your money using that strategy, making adjustments as necessary.
Now that you understand the difference between robo-advisors and discount brokers, you can decide which is right for you.
While some discount brokers offer robo-advisory services, not all do. On the other hand, robo-advisors typically don’t offer traditional brokerage features. Once you’ve made your decision, compare multiple robo-advisors and brokerages to find the one that’s best for you.
We mentioned a couple above, but here is a complete list of our favorite robo-advisors of 2023.