What is a robo-advisor best suited for?
Robo-advisors are often inexpensive and require low opening balances, making them available to retail investors. They are best suited for traditional investing and aren't the best options for more complex issues, such as estate planning. Robo-advisors have been criticized for their lack of empathy and complexity.
Robo-advisors are digital investment services aimed at ordinary investors—they are becoming an increasingly popular way to access the markets. On the plus side, robo-advisors are low-cost, often have no minimum balance requirements, and tend to follow strategies suited for new and intermediate investors.
They are becoming more popular among investors who seek low-cost, convenient, and personalized solutions for their financial goals. However, robo-advisors also face challenges in attracting and retaining customers, especially in a competitive and dynamic market.
The type of advisor that is better for you depends on what your financial needs are. 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.
| Company | Forbes Advisor Rating | Learn More CTA text |
|---|---|---|
| Betterment | 5.0 | Learn More |
| SoFi Automated Investing | 4.7 | Learn More |
| Vanguard Digital Advisor | 4.6 | Learn More |
| Vanguard Personal Advisor Services | 4.6 | Learn More |
- Limited Access to Human Advisors. ...
- Narrow Investment Choices. ...
- Might Not Consider All Your Investments. ...
- Tax-Loss Harvesting Isn't Always Helpful.
The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.
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.
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.
Robo-advisors cost less than traditional financial advisors. These electronic advisors typically impose annual fees of around 0.5% of assets under management, compared with 1% to 2% charged by many human advisors.
Do rich people use robo-advisors?
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.
They do not, however, generally function as stock brokers, instead choosing a basket of funds for you based on your goals. Don't expect a robo-advisor to beat the market since its goal is to maintain a balance with the market.
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.
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.
- Wealthfront – Best for Goals-Based Investing.
- Betterment – Best for Beginners.
- Empower – Best for Net Worth Tracking.
- Axos Invest – Best for Self-Directed Trading.
Other common designations for robo-advisors include "automated investment advisor," "automated investment management," and "digital advice platforms."
Getting your retirement right is a big deal, and a robo-advisor can help you get there. These automated advisors can build an investment portfolio based on your needs, such as when you want to retire and how much risk you can stomach. It's simple to get started and easy to continue growing your wealth.
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.
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.
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.
How do robo-advisors make money?
As with many other financial advisors, fees are paid as a percentage of your assets under the robo-advisor's care. For an account balance of $10,000, you might pay as little as $25 a year. The fee typically is swept from your account, prorated and charged monthly or quarterly.
Robo-advisors lack the ability to do complex financial planning that brings together your estate, tax, and retirement goals. They also cannot take into account your insurance, general budgeting, and savings needs.
The SEC's order also found that Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.
You can withdraw your balance at any time, subject to minimum account requirements. Typically, the withdrawal process takes between 3-5 business days to be completed.
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.
