Do robo-advisors outperform 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.
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.
Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.
Investors looking for a mix of investment advice, assistance with strategy and automatized management may want to create an account with a robo-advisor. On the other hand, index funds may be better for those looking to minimize fees and implement a long-term investment strategy that follows swaths of the stock market.
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|---|---|
| MS INVF US Insight | 52.26 | 34.65 |
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
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 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.
7. Seek Professional Finance Advice. Of high-net-worth individuals, 70 percent work with a financial advisor. You can compare that to just 37 percent in the general population.
The wealthy also trust and work with financial advisors at a far greater rate. The study found that 70% of millionaires versus 37% of the general population work with a financial advisor.
- Best for beginners: Betterment.
- Best for parents: Wealthfront.
- Best for high net worth: Charles Schwab.
- Best for women: Ellevest.
- Best for extra perks: SoFi Invest®
What is the average return of 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.
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.
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.
Potential drawbacks of investing in the S&P
The index has suffered huge declines in some years. The S&P 500 weighting system gives a small number of companies major influence, which could have an undue negative effect on the index if one or a few of them run into trouble.
As of Q2 2023, Linde plc (NYSE:LIN) shares were held by 70 of the 910 hedge funds tracked by Insider Monkey, valued at $4.6 billion. This makes Linde plc (NYSE:LIN) the most commonly owned stock by hedge funds on our list of 13 stocks that outperform the S&P 500 every year for the last 5 years.
Yes, you may be able to beat the market, but with investment fees, taxes, and human emotion working against you, you're more likely to do so through luck than skill. If you can merely match the S&P 500, minus a small fee, you'll be doing better than most investors.
- Employ standardized strategies off their questionnaire, offering limited customization.
- Cannot take a holistic view of your financial planning to help integrate your estate planning, tax strategy, etc.
- No human point of contact or limited human interaction if you have specific questions.
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.
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.
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.
What is the problem with robo-advisors?
The problem is that most robo-advisors do not offer comprehensive exposure to these assets. This means that investors must either open separate accounts elsewhere in order to gain exposure to these asset classes, or else capitulate to accepting a portfolio consisting only of stocks and bonds.
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.
What Does Warren Buffett Think of Financial Advisors? Warren Buffett thinks financial advisors charge too high fees relative to the value they provide. Many financial advisors will charge a 1% management fee which seems very reasonable to most ordinary investors.
- JP Morgan Private Bank. “J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said. ...
- Bank of America Private Bank. ...
- Citi Private Bank. ...
- Chase Private Client.
Generally, having between $50,000 and $500,000 of liquid assets to invest can be a good point to start looking at hiring a financial advisor. Some advisors have minimum asset thresholds. This could be a relatively low figure, like $25,000, but it could $500,000, $1 million or even more.
