Can a robo-advisor make you rich?
In the end, the most logical answer to the question of whether you can make a lot of money via the robo advising is, yes, over the long term, if you invest regularly. If you are an aggressive investor, you might make a lot of money in the short term with robo investing, or you might also lose a lot of money.
The return on investment will vary by portfolio, and not everyone will have the same investment mix. Most robo-advisors don't have a long track record. But according to the Robo Report, the five-year returns (2017 to 2022) from most robo-advisors range from 2% to 5% per year.
While a robo-advisor can be efficient in managing your investing decisions, a human advisor may be best for more complex decisions like helping you choose the right student loan repayment plan or comparing compensation packages for a new job. Cost: If cost is a factor, robo-advisors typically win out here.
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.
A robo-advisor can be a good choice when you're starting out and just looking for a simple way to begin growing your wealth. However, as your net worth improves and your situation becomes more complex, you might need to consider turning to a human financial advisor to help you navigate your financial future.
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.
A Lack of Real Diversification
If you were to look at the portfolios offered by any of the major robo-advisors, you'd see that they consist mostly of just two asset classes: Stocks and bonds.
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.
Online brokers are ideal for those who prefer a hands-on approach, making their own decisions and doing their own research. Robo-advisors are best suited for those who value simplicity and hands-off automation.
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.
Can robo-advisors lose money?
Markets can be unpredictable, and no form of investing is immune to potential losses. Robo-advisors, like human advisors, cannot guarantee profits or protect entirely against losses, especially during market downturns—even with well-diversified portfolios.
- Limited Access to Human Advisors. ...
- Narrow Investment Choices. ...
- Might Not Consider All Your Investments. ...
- Tax-Loss Harvesting Isn't Always Helpful.
It also didn't give people the ownership and flexibility that they wanted over their investments. The robo-advisor then invested your money for you and made trades based on your risk profile, but customers didn't receive personalised communication or updates about why trades were made.
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.
Free management and access to financial advisors and career counselors make SoFi Automated Investing a solid choice for beginning and younger investors.
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.
- 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.
Tax minimising: Most robo-advisors include the option to sell underperforming investments at a loss to offset taxes owed from other, higher-performing securities. This sophisticated strategy, also known as tax-loss harvesting, helps boost returns over a longer term period.
Robo-advisors help automate the decision-making, recommending a portfolio that aligns with an investor's goals and preferences. Robo-advisors may carry higher fees than ETFs, but their costs usually remain below those of a traditional human advisor.
How many Americans use robo-advisors?
Surprisingly, our survey found that just 16% said they use these digital wealth management platforms to build wealth for retirement, and 9% of respondents said they'd use a robo-advisor to build long-term wealth.
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.
If you require a high level of personalized service and direct management of your investments, a traditional human advisor might be better suited to your needs. Conversely, if cost and simplicity are your primary concerns, a robo-advisor might be the better choice.
The jury's still out on whether robo-advisors are the future. But as a financial professional, you may need to be able to articulate why and how financial planning requires a human element that robo-advisors may not deliver, as well as why prospective clients should choose you.
Who should use a robo-advisor? Robo-advice isn't just for new investors or those with lower cash balances. It's a good investing option for anyone who doesn't want to pick securities on their own, regardless of their income or investment experience.
