How risky are robo-advisors?
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.
Robo-advisors are safe to use. You can trust robo-advisors with your money after more than a decade of regulation and scrutiny. Some robo-advisors, like Personal Capital, even offer free financial tools for you to use to keep track of your net worth and analyze your own investments if you wish.
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 the new(ish) kid on the block in the investment management world. Because they have low or no minimum balance requirements to get started, they are accessible to beginners who want to invest in the stock market but aren't ready for or don't have enough assets to work with a traditional advisor.
Digital Advisor Use Dropped in 2022
High-net-worth investors exited robo-advisor arrangements at the highest rates.
It also didn't give people the ownership and flexibility that they wanted over their investments. The robo-advisor then invested your money for you and made trades based on your risk profile, but customers didn't receive personalised communication or updates about why trades were made.
| 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 |
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.
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.
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.
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.
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.
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.
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.
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.
| Company | Account Minimum | Fees |
|---|---|---|
| SoFi Automated Investing Best for Low Costs | $1 | $0 |
| M1 Finance Best for Sophisticated Investors | $100 ($500 minimum for retirement accounts) | 0%, $36/year for M1 Plus |
| Acorns Best for Those Who Struggle to Save | $0 | $3-$5/month |
The choice between a robo-advisor and a human financial advisor depends on individual preferences, needs, and circ*mstances. Robo-advisors offer cost-effective, efficient investment management with minimal human interaction, making them suitable for younger or less wealthy investors comfortable with technology.
Unlike live financial advisors, robo-advisors use computer algorithms to manage investment portfolios and make investing decisions. They typically have lower minimum investment requirements than financial advisors, and they tend to be less expensive.
The first robo-advisor Wealthfront (formerly known as KaChing) was launched in 2008. Thereafter, robo-advisors increased in popularity. The first robo-advisers were used as online interfaces by financial managers to manage and balance clients' assets.
Is Wealthfront Safe? Wealthfront carries the same safety protocols that you'll find in most major financial institutions. Your cash is insured by the FDIC, while investments are insured by the SIPC. 23 No insurance protects your investments from the price fluctuations of the stock and bond markets.
Do robo-advisors outperform the market?
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.
Your cash is insured by the Federal Deposit Insurance Corporation (FDIC). This coverage protects your cash in the event that a bank goes out of business. Wealthfront uses multiple partner banks to ensure FDIC coverage of up to $8 million for your cash deposits.
“In my view, for most people, the best thing to do is own the S&P 500 index fund,” Buffett said at Berkshire's 2020 annual meeting. Buffett's thinking here is straightforward. Most non-professional investors (and even many professional stock-pickers) have very little chance of outperforming the market.
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. If you wish to keep your Robo-Advisor account active, you'll be unable to withdraw any amount that would result in your balance dropping below $100.
Limited Flexibility. If you want to sell call options on an existing portfolio or buy individual stocks, most robo-advisors won't be able to help you. There are sound investment strategies that go beyond an investing algorithm.
