What is a robo-advisor?
A robo-advisor (also sometimes spelled as roboadvisor) is a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision. A typical robo-advisor asks questions about your financial situation and future goals through an online survey.
A robo-advisor (also sometimes spelled as roboadvisor) is a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision. A typical robo-advisor asks questions about your financial situation and future goals through an online survey.
The takeaway. Choosing between a human advisor and robo-advisor comes down to the level of complexity in your financial situation. For those who have more straightforward goals, a robo-advisor may be a good fit.
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.
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.
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.
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.
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.
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.
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.
Should I use a robo-advisor for my Roth IRA?
Because robo Roth IRA advisors are programmed to know the latest tax implications, these types of advisors are often more tax efficient. They'll be well-versed in tax-loss harvesting strategies to minimize your overall tax situation.
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.
Digital Advisor Use Dropped in 2022
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.
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.
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.
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%.
“One key benefit of using a robo-adviser for retirement savings is that the fees are much lower than a traditional adviser,” says Nick Holeman, director of financial planning at Betterment. “This is especially important for retirement savings, which oftentimes are the largest accounts an investor has.”
Schwab Intelligent Portfolios®
Our robo‑advisor builds, monitors, and automatically rebalances a diversified portfolio based on your goals. You can get help from Schwab professionals any time, 24/7.
Cons include more difficulty diversifying your portfolio, a potential need for more time invested in your portfolio, and a greater responsibility to avoid emotional buying and selling as the market fluctuates.
E-Trade provides access to a robo-advisor called Core Portfolios, which automates investment decisions. Robinhood does not offer a robo-advisor. For some, the availability or lack of automated investing could be a dealbreaker.
How much would I need to save monthly to have $1 million when I retire?
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.
In terms of cost, robo-advisors are much less expensive than financial advisors but still more expensive than doing it yourself. They may charge a monthly fee, such as $5 per month, or an annual management fee of 0.25% to 0.50% of your assets under management.
The results suggest that it is the individuals who benefit the most from robo-advising—i.e. those who have low international diversification, have high expense ratios, and have high portfolio volatility as self-directed investors— that are the most likely to sign-up for advice and the least likely to quit the service.
The other incentive financial advisors have to promote Roth IRAs is that most of them make their money via Assets Under Management (AUM). This means that their fee is paid by a percentage of the investments they manage for you. The industry norm is 1%, and in many cases, higher.
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.
