Are robo-advisors worth it long term?
A robo-advisor also might not be a good fit if you want to build a long-term relationship with your financial planner, have a complex financial situation or if you have a high net worth and could benefit from more personalized investment and tax advice.
However, robo-advisors offer limited flexibility to customize your investment strategy, and they can't provide more integral financial advice that accounts for things like tax and estate planning.
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.
According to Spectrem, on a scale of 1 to 100 (1 being low and 100 being high), wealthy investors rated their knowledge of robo advisers at 15.47, and only 6% said they have ever used one.
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.
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.
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.
It is just as possible to lose money using a robo-advisor as it is using a human advisor.
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.
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.
What percentage of people use robo-advisors?
Key findings
Despite this willingness, just 1% of respondents with investments say they use a robo-advisor. Looking more widely, 41% of consumers with investments have a financial advisor. Six-figure earners (56%) and baby boomers (50%) are most likely to have one.
Meanwhile, Wealthfront's equity allocation was boosted by a dedicated exposure to energy stocks (VDE) and the Schwab Dividend ETF, which both outperformed the S&P 500 index.
Learn more about how we review products and read our advertiser disclosure for how we make money. According to our research, Wealthfront is the best overall robo-advisor due to its vast customization options, fee-free stock investing, low-interest rate borrowing, dynamic tax-loss harvesting, and other key features.
- 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.
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.
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.
Many robos offer automated services that would be tough for a human to replicate, such as daily tax-loss harvesting. They may also automatically rebalance your portfolio when it deviates from the preset target allocations. Another positive is that it's easy to open a robo-advisor account online.
If you have 30 years until retirement
Waiting just 10 years has a huge effect on the amount you'll have to save to reach your goal. Even with an average annual return of 10%, you'll have to save $481 per month to get to $1 million before you retire. At 6%, you would need to save $1,021 per month.
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.
By providing efficient, low-cost, and accessible investing solutions, these automated investment platforms powered by algorithms and artificial intelligence (AI) have challenged the traditional wealth management environment. In 2023, robo-advisors are already expanding and transforming.
What is the largest robo-advisor?
- Vanguard Personal and Digital Advisor Services. $118.99 billion. 348,113. 12/31/2022.
- Empower (Formerly Personal Capital) $99.8 billion. 188,081. 6/14/2023.
- Schwab Intelligent Portfolios. $66.08 billion. 495,347. 12/31/2022.
- Betterment. $36.63 billion. 1,023,431. 05/01/2023.
- Wealthfront.
In 2024, it is projected that the assets under management in the Robo-Advisors market in Hong Kong will reach HKD US$2,672.00m. This market segment is expected to show a compound annual growth rate (CAGR 2024-2027) of 10.29%, resulting in a projected total amount of HKD US$3,585.00m by 2027.
Target Demographic
For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.
This has led some to suggest that Ramsey is “anti-ETF,” with exchange-traded funds being a competitor for mutual funds in the marketplace. But in response to a caller in August, Ramsey reiterated that he is not “anti-ETF,” he just doesn't like how some financial planners and investors use them.
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%.
References
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