Are robo-advisors worth it?
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.
While a robo-advisor can be efficient in managing your investing decisions, a human advisor may be best for more complex decisions like helping you choose the right student loan repayment plan or comparing compensation packages for a new job. Cost: If cost is a factor, robo-advisors typically win out here.
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.
Robo-advisor performance is one way to understand the value of digital advice. Learn how fees, enhanced features, and investment options can also be key considerations. Five-year returns from most robo-advisors range from 2%–5% per year.
Digital Advisor Use Dropped in 2022
High-net-worth investors exited robo-advisor arrangements at the highest rates.
A Lack of Real Diversification
If you were to look at the portfolios offered by any of the major robo-advisors, you'd see that they consist mostly of just two asset classes: Stocks and bonds.
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.
Yes. As with any form of investing, there's always a risk of losing money when using a robo-advisor. Markets can be unpredictable, and no form of investing is immune to potential losses.
Generally speaking, the more human touch required, the higher the cost for financial advice. Robo-advisors charge fees from 0.25% to 0.50% of the amount managed per year, though most services fall toward the bottom of that range. Many will take on new clients with $0 to open an account.
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.
Do robo-advisors outperform the S&P 500?
Do robo-advisors outperform the S&P 500? Robo-advisors can outperform the S&P 500 or they can underperform it. It depends on the timing and what they have you invested in. Many robo-advisors will put a percentage of your portfolio in an index fund or a variety of funds intended to track the S&P 500.
On the surface, robo-advising is just as safe as working with a human financial advisor. A robo-advisor's platform may include biases or errors that prevent it from achieving the best investment returns, but then again, humans are also subject to mistakes.
Funds' expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more.
Fidelity's robo-advisor, Fidelity Go, frequently makes our list of the best robo-advisor for its low fees — including free management on balances below $25,000 — integration with other Fidelity accounts and its use of Fidelity Flex funds, which have no expense ratios.
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
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.
Robo-advice remains too much of a solution looking for a problem. As a pure end-to-end D2C solution, it is doomed to failure. Nevertheless, as advisers, there is no room for complacency.
Last year, roughly 30 million Americans used robo-advisors to grow their assets. Statista expects another 20 million people in the US to start using their services in the next four years, pushing the total user count to nearly 50 million.
While many robo-advisors attempt to provide education and advice through their platforms, they're unable to evaluate your bigger financial picture or make personalized recommendations. Financial advisors work with you to develop holistic plans to meet all of your financial goals.
But according to the Robo Report, the five-year returns (2017 to 2022) from most robo-advisors range from 2% to 5% per year. And Wealthfront, one of the best robo-advisors available, also states that customers can expect about a 4% to 6% return per year, depending on their risk tolerance.
What percentage of people use robo-advisors?
Surprisingly, our survey found that just 16% said they use these digital wealth management platforms to build wealth for retirement, and 9% of respondents said they'd use a robo-advisor to build long-term wealth.
A robo-advisor can help ease the burden of managing your portfolio as you transition to retirement—and help you figure out how to tap your assets in tax-smart ways.
And they will automatically adjust your portfolio based on these over time. Because there isn't an advisor's salary to pay, robo-advisors charge a fraction of the management fee of traditional financial advisors. By nature, most robo-advisors are appropriate for beginners.
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%.
| Pros | Cons |
|---|---|
| Often less expensive than working with a professional financial advisor | More costly than doing it yourself |
| Easy to start and may have a low account minimum | Could take a narrow view of your investments or financial situation |
| Includes ongoing management | Limited personalization |
