Why would you use a robo-advisor instead of a personal financial advisor?
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.
On the plus side, robo-advisors are low-cost, often have no minimum balance requirements, and tend to follow strategies suited for new and intermediate investors.
In addition to creating an automated portfolio, robo-advisors can also offer their customers the following benefits: Lower fees compared with a traditional financial advisor. Lower capital required to start. The ability to avoid human error and bias.
As a result, while financial advisors cost more than robo-advisors, they offer comprehensive financial services instead of only an investment account. Additionally, financial advisors actively oversee your investments, potentially giving you better returns than an automated investment approach.
The most sophisticated robo-advisors may offer automatic portfolio rebalancing and tax-loss harvesting, but they don't come close to providing the full range of services that human financial advisors offer. As people move through life, their priorities and financial goals evolve.
Many provide access to human financial advisors to help clients with investment planning. Since they run automatically and are accessible online, robo-advisors can help you get started investing very quickly, often in a matter of minutes.
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.
|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
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 human interaction: Robo-advisors do not offer the same level of human interaction as traditional financial advisors. This can be a disadvantage for investors with more complex financial needs or investment goals.
Should I use a robo-advisor or do it myself?
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.
Since robo-advisors rely on algorithms to make investment decisions, there is a possibility for errors, biases or overfitting that could lead to suboptimal performance. Additionally, these algorithms might struggle to adapt to unexpected market events, as they are typically based on historical data.
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.
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.
Rowe Price U.S. Equity Research fund (ticker: PRCOX) is in this exclusive club, having bested—along with a team of about 30 research analysts—the S&P 500 index for the past five years on an annualized basis. U.S. Equity Research is a Morningstar five-star gold-medal fund.
Create Complex Financial Plans
Robo-advisors lack the ability to do complex financial planning that brings together your estate, tax, and retirement goals. They also cannot take into account your insurance, general budgeting, and savings needs.
More recently, a decline in the ranks of advisors appears to be more a result of advisors retiring than firms cutting back, with virtually all wealth management firms lamenting that demand for advisors far outstrips supply.
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.
Robo-advisors are beneficial because they have low fees, typically less than 1% of the AUM. They are more accessible and efficient. However, they offer limited investment options and offer no human interaction.
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.
What percentage does the robo-advisor charge?
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.
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 cost to use a robo-advisor generally ranges from 0.25% to 0.50% of your portfolio compared to 0.5% to 1.5% for traditional advisors. Low minimums. Robo-advisors often have no or low minimum investment requirements, making them accessible to newer investors with fewer assets.