When shopping online, technology can save you time, money and frustration. Through the magic of computer algorithms, you can search for, locate and buy the perfect coffee table in minutes — often at considerable cost savings.
Robo-advisors can do the same for your investments. But what is a robo-advisor?
These tech-based investing tools are part personal shopper and part savvy investor, delivering the ideal investment mix to your door at costs lower than a traditional financial advisor. In fact, MagnifyMoney’s latest research shows that a majority of Americans (63%) are open to using robo-advisors. But whether you should use a robo-advisor to achieve your financial goals depends on your investor profile and how involved you want to be with your investments.
A robo-advisor (“robo” for short) is a tech-based tool that takes in your financial information, crunches the numbers and puts out the ideal mix of investments based on your shared data.
For example, say you’re a young investor who wants to retire early, and you open an IRA with a robo based on that goal; you’re willing to take on an above-average level of risk so you can grow your savings over the next 20 years.
Your robo-advisor journey might look like:
And all you’ll have to do is set up your account once and make your regular retirement contributions.
By leveraging technology to build your portfolio and keep your asset allocation on track, robos tend to cost less than working with traditional financial advisors. And that cost savings might also speak to the rising popularity of robos among investors. As of 2021, more than 3 million Americans use robos to manage more than $1 trillion in total assets — a figure expected to rise to more than $16 trillion by 2025.
Most robos follow the same streamlined process for creating and managing your portfolio.
From the biggest robo-advisors to the up-and-coming, you can expect to find the basics — automated portfolio construction based on the data you share, as well as ongoing account maintenance. However, some robo-advisors offer enhanced services that you might find valuable.
Many robos automatically rebalance your portfolio to keep your asset allocation on track with your risk tolerance and time horizon. Their algorithms will buy and sell assets until your portfolio is back in balance.
Certain robos offer tax-loss harvesting, a strategy that can minimize your capital gains tax exposure. This tax-reduction strategy is a three-step process: underperforming securities are sold at a loss, the losses on your taxes are claimed to reduce your tax burden, then the proceeds are reinvested in different securities to meet your target asset allocation.
Some robos offer access to certified financial planners (CFPs) who can help create a financial plan, or check in to see if you’re on track to reach your goals. Access varies depending on the provider, as do fees — some offer no-cost access, while others charge a la carte consulting fees.
If you want your investments to align with your social values, a robo with ethical investing capabilities can help. Some robos offer portfolios focusing on climate change or empowering marginalized groups.
Much like the price on that coffee table will vary depending on the seller, robo-advisor costs will vary based on the provider.
These tech-fueled investing platforms usually charge based on a percentage of your assets under management (AUM). For example, if you open an account with a robo-advisor charging an AUM fee of 0.20% and deposit $10,000, you’d pay $20 per year.
To help you get an idea of how costs can vary, here are the AUM fees for five of the biggest robo-advisors:
However, not all robos charge you based on your account balance. Some, like Blooom and Acorns, use a flat-fee model, which tends to be better for larger accounts and less favorable for smaller ones. For example, Acorns’ $36 per year subscription would be 0.36% of AUM for a $10,000 portfolio, but just 0.07% of AUM for a $50,000 portfolio.
So, how do robos and traditional financial advisors compare?
|Build and manage investment portfolios|
|Offer advanced services (e.g., tax-loss harvesting, ethical investing)|
|Rebalance your portfolio|
|Charge clients based on AUM|
|Average AUM fees||0.00% to 0.40%||0.59% to 1.18%|
On average, a robo-advisor will save you on fees and, in many cases, offer similar capabilities.
By this point, you might wonder why you’d hire a financial advisor if you can use a less expensive robo. Before you take the leap to open an account, let’s return to our online furniture shopping metaphor again.
By setting the right filters — such as size, color and shape — you’ll get plenty of coffee table options from the search engine. Robos can help you set the filters for your investments, even if you don’t know what kind of portfolio you should have. Just fill out the questionnaire, and the robo-advisor will deliver what you need.
But sometimes, those filters aren’t quite enough. Maybe you’d like to ensure your new table matches your couch, your floors or the side tables you already have. When scrolling through endless listings, those coffee tables might look good in staged, professional photos, but how would they look in your living room?
A robo can crunch the numbers and create a portfolio, just like you can easily find a 36” round, solid walnut coffee table online. But, ultimately, you might want to consult an interior designer to ensure it’s the right table — after all, it’s a table you’d like to last for years.
Similarly, a financial advisor can give you a more holistic perspective than a robo in a relationship designed to last over time — of course, interior designers and financial advisors both cost a bit extra, too. A financial advisor might not cost as much as you think, though.
Expert tip If your finances are simple today, you could start with a robo. But if your finances end up having more moving parts later on, you could switch to a financial advisor who can offer more nuanced advice.
Finding the right coffee table might seem easier than investing your money, but in both situations, it’s important to find the right fit at a reasonable price.
Robo-advisors are a low-cost alternative to financial professionals. They’re a good fit for beginner investors, folks with smaller portfolios and those who prefer a hands-off investing approach. However, investors with more complex finances or a higher net worth may want to work with a traditional financial advisor alongside or instead of a robo.
Your performance will depend on your risk tolerance, to an extent. If you have an aggressive risk profile, you could perform better than a strong bull market or worse than a falling bear market, for example.
Robo-advisors generally don’t post their portfolio returns publicly. Since most robo-advisors offer many different portfolio structures, clients can have different returns even with the same robo-advisor.
A robo-advisor will give you a questionnaire to determine your financial goals, time frame and appetite for risk and create an asset allocation that fits your situation. Some robo-advisors work from relatively few portfolio templates, while others have seemingly endless possibilities for investing your money.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.