Should I get a robo-advisor or no?
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.
For some, the simplicity, accessibility, and lower costs make them a very appealing choice. However, for those desiring more personalized service and sophisticated investment strategies, a human financial advisor may be worth the additional cost.
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.
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.
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.
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.
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.
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.
2 Cybersecurity threats. Another risk of using robo-advisors is that they may be vulnerable to cyberattacks that compromise your data and assets. Robo-advisors store and process large amounts of sensitive information, such as your identity, bank accounts, portfolio holdings, and transactions.
On the surface, robo-advising is just as safe as working with a human financial advisor. A robo-advisor's platform may include biases or errors that prevent it from achieving the best investment returns, but then again, humans are also subject to mistakes.
Are robo-advisors good for beginners?
And they will automatically adjust your portfolio based on these over time. Because there isn't an advisor's salary to pay, robo-advisors charge a fraction of the management fee of traditional financial advisors. By nature, most robo-advisors are appropriate for beginners.
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.
| Company | Account Minimum | Fees |
|---|---|---|
| SoFi Automated Investing Best for Low Costs | $1 | $0 |
| M1 Finance Best for Sophisticated Investors | $100 ($500 minimum for retirement accounts) | 0%, $36/year for M1 Plus |
| Acorns Best for Those Who Struggle to Save | $0 | $3-$5/month |
Robo-advisor performance is one way to understand the value of digital advice. Learn how fees, enhanced features, and investment options can also be key considerations. Five-year returns from most robo-advisors range from 2%–5% per year.
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.
Funds' expense ratios: 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.
Robo-advisors are much quicker to respond to changes in your assets, but they are not able to predict market outcomes. It is just as possible to lose money using a robo-advisor as it is using a human advisor.
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.
Some robo-advisors only offer human support for tech- and account-related questions, which means there's no one to answer questions about your investments. Others have a hybrid model which may give you access to human 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.
Are robo-advisors better than financial planners?
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.
Target Demographic
Many digital platforms target and attract certain demographics more than others. For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.
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.
Is Wealthfront Safe? Wealthfront carries the same safety protocols that you'll find in most major financial institutions. Your cash is insured by the FDIC, while investments are insured by the SIPC. 23 No insurance protects your investments from the price fluctuations of the stock and bond markets.
Robo-advice is here to stay, but the era of Silicon Valley-backed robo platforms may have already reached its heyday.
