Robo-Advisor Flagship: Are Robo-Advisors Worth It?
Robo-advisors are offering another path to invest if you don't want to hire a traditional financial advisor. They're pitching their services as easier and cheaper. But are robo-advisors worth it?
These platforms offer digital investment management. They use automated technology to create portfolios that are semitailored to their investors. And these portfolios are often composed of passively managed, low-cost funds.
You could open an account for $5,000 or less. And some companies don’t require a minimum investment amount. New investors or those with smaller balances might find this appealing.
Many robo-advisors ask clients to fill out a basic questionnaire to understand their goals, retirement plans, and risk tolerance. Others skip asking questions and offer behavioral coaching through text or email to help clients stay on track.
Investment advice from a traditional or robo-advisor comes with a fee, although in some cases, robo-advisors embed their fees in what otherwise looks like a free product.
Digital advice is cheaper compared to what a real-life advisor would charge. Morningstar surveyed more than a dozen robo-advisors and found the median advisory fee stood at 0.30% of assets per year. A traditional financial advisor typically charges 1%.
Here’s an example.
An investor with a $500,000 portfolio might pay a traditional advisor $5,000 a year. The same investor could pay a robo-advisor $1,500 a year.
Another layer of typical costs for digital advice is expense ratios for the funds in the portfolio. It all depends on whether the company charges for that. A few are free, but in those cases, the robo-advisors find other ways to make money.
Robo-advisors typically steer younger clients or more-aggressive investors to portfolios heavier in stocks or other volatile assets, and they recommend portfolios heavier in bonds or less-volatile assets to older or more conservative investors.
The level of personalized financial planning increases as one moves from digital advice toward traditional advice. Robo-advisors provide basic goal and financial planning tools like savings and debt reduction calculators. Some companies provide access to real-life advisors to discuss financial topics for an additional annual or flat fee. Those advisors offer complex financial planning like traditional advisors. Their customized services include Roth conversions, tax strategy, and estate planning. However, they’re confined to interacting with clients over the phone or on video calls. In-person interaction is missing. Some investors might feel more comfortable working in person with a traditional advisor to make decisions.
Whether robo-advisors are worth it comes down to an investor’s needs. They might appeal better to an investor looking for an automated portfolio, cheaper fees, and have little need to meet face-to-face with a human being.