What Is a Robo Advisor? (2019)

What Is a Robo Advisor? (2019)


Robo advisors vary from brokerage to brokerage, but generally, are digital services that prepare automated financial services based on your preference, without human intervention. Companies do this through the use of complex computer algorithms and advanced software.

Here are a few services that a robo advisor may provide:

  • Automatically select investments and create a diverse portfolio (based upon your preferences)
  • Automatic rebalancing of domestic and international stocks, bond funds, and cash
  • Management of retirement accounts, such as your 401k
  • Make changes to your investments to align your portfolio back to a target allocation
  • Tax optimization (reducing your tax bill through a process called tax-loss harvesting)
  • Weigh your priorities (time, risk tolerance, financial goals) opposed to market conditions, market shifts, etc.

 

How Do Robo Advisors Work?

Although each robo advisor is different in some way, they usually operate in similar ways. You will first complete an examination that will gauge your investment needs as well as your risk tolerance.

The robo advisor will then automatically builds a diversified portfolio of funds. Human financial experts consistently monitor the market and all investments to make certain that your portfolio is rebalanced correctly (an algorithm does this).

Many of these robo advisors will include access to a professional financial advisor who can provide their recommendations to help you achieve your target result. Now you sit back, log into your account from time to time to track your progress, and add contributions or withdraw funds as needed.


 

How Much Do Robo Advisors Cost?

With a robo advisor, you pay the expenses of the investments used and a reasonably cheap service fee.

The fee may be structured so that it is a percentage of your assets or a fixed monthly fee. For a monthly fee, most robo advisors will usually charge from a range of about $15 a month to $200 a month, obviously depending on the size of your portfolio. If you decide to structure it so that it takes a percentage of your assets, a robo advisor will typically charge you from 0.15% to 0.50% of your account size every year. Most robo advisors charge 0.25%. So, if you had $100,000 in your account, a 0.25% fee would result in $250 being charged from your account a year. Though this is certainly a very small percentage, it certainly equates to a lot over a long period of time, as we will discuss later in this article.

Expenses associated with the investments used by the robo advisor must also be paid. An example of this would be mutual funds and ETF’s (exchange-traded funds). These have management fees (expense ratios), meaning that the fee is automatically taken out of the assets before the investor receives any returns.

Below you will find a list of the fees charged by today’s most popular robo advisors. Some may offer a free trial period so you can become familiar with how they work before you are charged.

 

Robo Advisor Fees
Balance
Minimum $5k $10k $50k $100k $1M
Acorns $0 0.25% 0.25% 0.25% 0.25% 0.25%
Ally Invest $2,500 0.30% 0.30% 0.30% 0.30% 0.30%
AssetBuilder $50,000 N/A N/A 0.45% 0.45% 0.30%
Betterment $0 0.35% 0.25% 0.25% 0.25% 0.15%
Ellevest $0 0.25% 0.25% 0.50% 0.50% 0.50%
FutureAdvisor $10,000 0.50% 0.50% 0.50% 0.50% 0.50%
Hedgeable $0 0.75% 0.75% 0.70% 0.65% 0.30%
Liftoff $5,000 0.40% 0.40% 0.40% 0.40% 0.40%
Personal Capital $25,000 N/A 0.89% 0.89% 0.89%
Rebalance 360 $100,000 N/A N/A N/A 0.50% 0.50%
ReSolve Online Advisor $250,000 N/A N/A N/A 0.95% 0.95%
Schwab Intelligent Portfolios $5,000 0.00% 0.00% 0.00% 0.00% 0.00%
SigFig $2,000 0.00% 0.00% 0.25% 0.25% 0.25%
SoFi Invest $0 0.00% 0.00% 0.00% 0.00% 0.00%
Vanguard Personal Advisor $50,000 N/A N/A 0.30% 0.30% 0.30%
Wealthfront $500 0.00% 0.00% 0.25% 0.25% 0.25%
Wealthsimple $0 0.50% 0.50% 0.50% 0.40% 0.40%
WiseBanyan $10 0.00% 0.00% 0.00% 0.00% 0.00%

 

 

Are Robo Advisors Worth It?

  1. The cost is very reasonable compared to other alternatives, such as human financial advisors, who charge anywhere from 1% to 2% of your profits, which is much more than a robo advisor’s 0.15% to 0.75%.
    Many times, these robo advisors also end up increasing your returns through tax loss harvesting, which ends up in paying the fee for the robo advisor.
  2. Robo advisors rebalance portfolios very easily. Due to this, they can also do it frequently, whereas if you were in complete control of your account, it would take much more time, effort, and hassle.
    Rebalancing makes sure that, at the very least, your desired risk level stays the same. Plus, rebalancing improves your returns over time when compared to portfolios that are not rebalanced.
  3. Tax loss harvesting is much better accomplished by computers than it is by humans. It is a strategy where losing investments are sold in order to create tax losses, offsetting taxable gains in other areas.
    Tax loss harvesting, like rebalancing, may also eventually result in an increased return on investment. This combined with rebalancing results in an offset to the fee of the robo advisor and sometimes results in an even higher return.
  4. Robo advisors are extremely convenient. It is impossible to overlook this. They invest for you almost automatically, leaving you time to do anything else with your time and finding other avenues to increase your wealth.

 

Can the Technology Be Trusted? Is It New?

Robo advisors are not very new. They have been in the market for almost two decades now and have shown to be quite reliable.

Online robo advisors have been replacing the “middle-man” financial advisor since 1999. There can, however, be a case made for human advisors and in fact, as mentioned earlier, several companies that have robo advisors also provide the services of a financial advisor. These professionals can help the investor from making reckless decisions when the market is doing something odd or under other special circumstances.

 

When to Not Use a Robo Advisor

  1. You like to invest on your own. You may find robo advisors to be boring and instead prefer to pick your own investments. If you have any sort of interest in researching your own stock choices or hitting it big on a lucky stock pick, these robo advisors are not for you.
  2. You want to beat the market, not match it. You want higher returns, consistently. This is extremely difficult, and even individuals such as Warren Buffet believes he cannot beat the market anymore, when answering a question on whether an investor should invest in Berkshire Hathaway or the S&P 500 index. To beat the market, you need immense skill. Though challenging, it is possible, but it is only something a human investor can do. A robo advisor is unlikely to beat the market every year. A robo advisor will probably earn a little bit less than the overall market. In times where the market dips, however, the robo advisor will deal you less losses.
  3. We don’t know how robo advisors will perform in a bear market. There is no track record that can show how these advisors will perform in a declining market for a long period of time. A recession will result in large losses, and this is where a human could beat the robo advisor more consistently.

 

Should You Get a Robo Advisor?

Really, it is up to you. You have to measure the pros and cons and your own personal preferences. Overall, these robo advisors are truly a safe investment, save lots of time and effort, and are affordable for the service they provide.