Can you lose money with robo-advisors?
While robos provide exposure to the broad stock market, you're at risk of losing money. This is true even with rebalancing and tax-loss harvesting. That's why you want to diversify your types of investments across different asset classes. That means also having your money in cash, real estate, and perhaps commodities.
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.
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.
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.
“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.
Learn more about how we review products and read our advertiser disclosure for how we make money. According to our research, Wealthfront is the best overall robo-advisor due to its vast customization options, fee-free stock investing, low-interest rate borrowing, dynamic tax-loss harvesting, and other key features.
Do any robo-advisors beat the market? Robo-advisors are set up to mainly meet the market's performance so you shouldn't invest in a robo-advisor expecting to beat the market. Many automated investing services will put an investor's money in index funds that track the S&P 500.
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.
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.
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.
How much does it cost to put in a robo-advisor?
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.
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.
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.
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.
The frequency of portfolio rebalancing by a robo-advisor is ongoing and automatic. This is one of the many benefits of using a robo-advisor like Daffy. Unlike most investors who only rebalance their portfolio idiosyncratically, maybe once a year or every couple of years when they remember, robo-advisors never forget.
- Betterment. Best Robo-Advisor for Everyday Investors.
- SoFi Automated Investing. Best Robo-Advisor for Low Fees.
- Vanguard Digital Advisor. Best Robo-Advisor for Beginners.
- Vanguard Personal Advisor Services. Best Robo-Advisor for High Balances.
- Wealthfront.
The latest MagnifyMoney study of nearly 1,600 Americans finds that 63% of consumers are open to using a robo-advisor to manage their investments, with millennials being the most open (75%). That said, only 41% of Americans with investments use a financial advisor — and just 1% say they use a robo-advisor.
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.
Target Demographic
For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.
Are robo-advisors better than financial planners?
While robo-advisors offer a hands-off approach and low fees & minimums, human financial advisors provide a personal touch, they are able to accommodate complex financial scenarios with a depth of understanding beyond algorithmic capabilities.
- Vanguard Personal and Digital Advisor Services. $118.99 billion. 348,113. 12/31/2022.
- Empower (Formerly Personal Capital) $99.8 billion. 188,081. 6/14/2023.
- Schwab Intelligent Portfolios. $66.08 billion. 495,347. 12/31/2022.
- Betterment. $36.63 billion. 1,023,431. 05/01/2023.
- Wealthfront.
In the Future: Trends and Challenges
The incorporation of new technology such as natural language processing and machine learning is projected to improve the capabilities of robo-advisory services, allowing for more complex financial planning, risk assessment, and investing strategies.
Thanks to the speed of the operations performed by the trading robot, the investor takes advantage of the best opportunities for profit. The most profitable stocks are instantly detected by AI. Anticipating upward trends also allows you to open positions at the right time and close them more efficiently.
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%.
