Is it worth paying for a robo-advisor?
Key Takeaways. Robo-advisors can be worth it for set-it-and-forget it investors who want automated, diversified portfolios. These low-cost, low-minimum platforms are ideal for novice investors seeking competent portfolio management.
Key Takeaways. Robo-advisors can be worth it for set-it-and-forget it investors who want automated, diversified portfolios. These low-cost, low-minimum platforms are ideal for novice investors seeking competent portfolio management.
However, robo-advisors offer limited flexibility to customize your investment strategy, and they can't provide more integral financial advice that accounts for things like tax and estate planning.
Five-year returns from most robo-advisors range from 2%–5% per year. * And the performance of these automated investment services can vary based on asset allocation, market conditions, and other factors.
Digital Advisor Use Dropped in 2022
High-net-worth investors exited robo-advisor arrangements at the highest rates. Here's how the data broke down along asset levels: $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.
- Limited Access to Human Advisors. ...
- Narrow Investment Choices. ...
- Might Not Consider All Your Investments. ...
- Tax-Loss Harvesting Isn't Always Helpful.
Doing it yourself can give you more control, flexibility, and customization over your investments, but it also requires more research, monitoring, and discipline. You should consider your goals, risk tolerance, and investment style before choosing between a robo-advisor or doing it yourself through an online broker.
Robo-advisors are much quicker to respond to changes in your assets, but they are not able to predict market outcomes. It is just as possible to lose money using a robo-advisor as it is using a human advisor.
This will vary significantly depending on the risk profile of the portfolio, broader market conditions, and the specific robo-advisor used. Some robo-advisor portfolios may outperform the S&P 500 in certain years or under specific conditions, while in others, they underperform.
While it's smart to be cautious when trusting others with your money, a robo-advisor may be just as safe as a human financial advisor. But investing always comes with the risk of losing money, and that's true whether you're investing on your own, hiring a financial advisor or using a robo-advisor.
What are the cons of robo-advisors?
A Disadvantage of Robo Advisors – tax-loss harvesting can create headaches at tax time. Tax-loss harvesting is when you sell a security at a loss for tax purposes. Then you use the loss to offset any capital gains you might have, up to $3,000. You're not actually eliminating tax payments, you're just deferring them.
“The biggest advantage they provide is low cost,” says Max Pashman, a CFP and owner of Pashman Financial. “You can have your portfolio managed for a very low management fee compared to the average rate of an advisor that typically charges 1% or more to invest [your] money,” he says.
Robo-advisors often build portfolios using a mix of various index funds. But depending on the asset class mix and the particular index funds selected, a robo-advisor may underperform or outperform a broad equity index like the S&P 500.
| Company | Forbes Advisor Rating | Annual advisory fee |
|---|---|---|
| Betterment | 5.0 | 0.25% |
| SoFi Automated Investing | 4.7 | None |
| Vanguard Digital Advisor | 4.6 | No more than 0.20% |
| Vanguard Personal Advisor Services | 4.6 | 0.30% |
Robo-advisors are less expensive than traditional advisors—but their low, up-front price comes with a loss in quality. Robo-advisors lack an irreplaceable human element, which prevents them from providing the essential qualities and services characteristic of traditional financial advisors.
For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so – potential savings for you. Plus, the ease of starting and managing the account can't be overstated.
75% of millennials would consider using a robo-advisor — the highest of any generation — while just 43% of baby boomers say the same. Additionally, men (69%) are more likely to consider using a robo-advisor than women (58%). Despite this willingness, just 1% of respondents with investments say they use a robo-advisor.
If you have 30 years until retirement
Waiting just 10 years has a huge effect on the amount you'll have to save to reach your goal. Even with an average annual return of 10%, you'll have to save $481 per month to get to $1 million before you retire. At 6%, you would need to save $1,021 per month.
According to our research, Wealthfront is the best overall robo-advisor due to its fee-free stock investing, low-interest rate borrowing, dynamic tax-loss harvesting, and other key features.
Robo-advisors make money through annual fees, primarily management fees called a wrap fee. The wrap fee covers a percentage of the assets under management (AUM). Compared to a traditional financial advisor, robo-advisors charge lower advisory fees, typically around 0.25%.
What robo-advisor has the lowest fees?
SoFi Automated Investing
SoFi Automated Investing is among the cheapest robo-advisor options available. There is no management fee, so your only costs are the expense ratios of the funds in your portfolio, and these are also kept to a minimum.
Robo-advisors offer guidance and support to help with your investment strategy, while do-it-yourself ETF investing gives you more flexibility and control without providing any personalized advice.
If you require a high level of personalized service and direct management of your investments, a traditional human advisor might be better suited to your needs. Conversely, if cost and simplicity are your primary concerns, a robo-advisor might be the better choice.
Both Wealthfront and Schwab have had their run-ins with the SEC. In 2018, Wealthfront was fined $250,000 for making false claims regarding a tax-loss harvesting strategy it offers its clients. Wealthfront failed to manage the accounts properly and 31% of the participants faced penalties due to the mismanagement.
Robo-advisors are here to stay and will continue to evolve.
