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Are Robo-Advisors Worth It?


Since the first robo-advisor launched in 2008, these automated investment management services have grown enormously. Thanks to low cost, low minimums and always-on convenience, robo-advisors have proven highly attractive especially to new investors with modest assets. Robo-advisors have significant limitations, however, and the decision about whether a robo-advisor is worth it is not always easy to make.

If you prefer a more hands-on approach, a financial advisor could help you put an investment plan together for your needs and goals.

Robo-Advisor Basics

Robo-advisors provide digital investment management services driven by computers, software and algorithms. While investment professionals have long used similar tools, only when Betterment arrived on the scene in 2008 were they made available to the investing public.

Today, robo-advisors manage $1.7 trillion of assets, a figure projected to grow by 25% in 2022, according to Statista. More than $1.2 trillion of that is in the U.S. The number of worldwide users of robo-advisors is expected to be nearly 479 million by 2025, with about $5,139 in assets for each user.

Robo-Advisor Benefits

Robo-advisors offer investment portfolios tailored to individuals, which are based on user answers to online questionnaires. Portfolios are diversified, mostly using Modern Portfolio Theory, and automatically balanced periodically. Some robo-advisors offer tax loss harvesting, options to talk to human advisors, mobile 24/7/365 access via smartphone and other features.

Robo-advisors cost less than financial advisors. Robo-advisor annual fees average about 0.50% of assets under management, while human advisors often charge from 1% to 2%. In addition, robo-advisors generally let investors open accounts for much lower initial investment amounts than traditional advisors.

Robo-Advisor Drawbacks

SmartAsset: Are Robo-Advisors Worth It?

On the downside, robo-advisors usually lack the personal touch. Although some robo-advisors offer an option to talk to human advisors, most are strictly online. Some investors who aren’t comfortable accessing accounts online without human contact don’t care for robo-advisors.

Robo-advisors also have limited investment choices, typically a selection of exchange-traded funds. This can make many of them a poor fit for investors who want to buy individual securities or choose form a wider range of funds.

Finally, robo-advisors with few exceptions don’t offer many standard financial advisor services. For tax management, estate planning, advice on budgeting and saving for education, investors generally have to go elsewhere.

Dollars and Cents: Is It Worth It?

Robo-advisors don’t just compete against traditional financial advisors. They are also up against people who want to manage their own money without outside assistance. The do-it-yourself approach lets investors set their own goals, choose their own investments and strategies, and pay no fees to outside experts, whether humans or algorithms.

One way to consider whether robo-advisors are worth it is to balance the cost of the robo-advice against the expected gain. A key factor is how much the investment has to return before the robo-advisor services pay for themselves.

As an example, if a robo-advisor charges 0.25% of assets under management, you break even if your portfolio averages at least 0.25% more in annual return than if the robo-advisor were not used. Of course, a quarter of a percentage point is not a lot and it can be difficult to predict whether a robo-advisor is likely to beat that mark.

Another way to look at it is the dollar amount a robo-advisor would collect in fees over a period of years. A seemingly insignificant fractional percentage can add up to a significant sum of money in a couple of decades.

For instance, a $100,000 investment that returns 4% annually with no investment advisor fees would be worth $219,000 after 20 years. If an investor paid a robo-advisor a 0.25% annual fee, that would have just $208,000 in it after 20 years. So in this case the robo-advisor would cost about $11,000.

The dollar cost alone doesn’t consider other advantages of robo-advisors such as low minimums and high convenience. But it is worth knowing the long-term cost of these advantages.

Bottom Line

SmartAsset: Are Robo-Advisors Worth It?

Robo-advisors are probably most worthwhile for retail investors, especially those with small amounts to invest or who are new to investing. More affluent investors with complex needs may be more suited to traditional financial planners. However, robo-advisors constantly evolve and add new services. For example, Betterment, a robo-advisor, recently bought Makara, which manages cryptocurrency portfolios.

Investing Tips for Beginners

  • A financial advisor can help you decide whether a robo-advisor is worth it. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider a few advisors before settling on one. Finding a trustworthy advisor is important for your finances. Here are the questions you should ask an advisor to ensure that you are making the right choice.
  • If you’re looking for lower minimum investment account requirements and fees, here’s a roundup of top robo-advisors for your needs.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

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