Robo-advisors, including Wealthfront and Betterment, aim to take on traditional financial advisors. So how do they stack up?
Where Robo-Advisors Shine
There are areas where a robot is a far better money manager than either a DIYer or a financial advisor. In this case, the robot is a money management platform backed by a sophisticated algorithm. Here’s where robo-advisors come out on top.
Fees and Minimums
Once the company creates the algorithm, the robo-advisor has cheap (or no) ongoing overhead costs, whereas personal financial advisors need to earn a salary every year. The average financial advisor makes almost $90,000 per year. Customers pay these salaries through an hourly fee or as a percentage of their total returns or assets. In contrast, robo-advisors’ fees can go as low as 0% in the case of Schwab’s Intelligent Portfolios. Also, advisors may require clients to have a large minimum account balance. In contrast, robo-advisors come with low (or no) account minimums. This makes investing more accessible to those with less to invest.
Rebalancing
Rebalancing refers to buying and selling investments to fine-tune your mix of stocks, bonds, and other investments. Financial experts recommend rebalancing your portfolio regularly to ensure that you retain your preferred mix of asset classes. Maintaining this diversification can reduce volatility.
Matching Market Returns of Their Benchmarks
Market-matching returns don’t sound glamorous, but the allure of beating the market with active mutual funds often proves fruitless. In a 2021 study, less than half of actively managed funds managed to beat the market year-over-year, and that share falls to just 25% when looking at a 10-year period.
What Robo-Advisors Can’t Do (Most of the Time)
Robo-advisors have many advantages, but there are some tasks best left to a human—particularly for the very wealthy or those with complicated needs. Here’s where robo-advisors fall short (most of the time).
Create a Comprehensive Financial Plan
If you have a high net worth, a robo-advisor may not be enough for you. You may need a trusted advisor who can examine your entire financial picture, including estate issues, taxes, trusts, and life insurance considerations. A full-service financial advisor can manage your investment portfolio while tracking your broader economic concerns. Some robo-advisors offer some level of human assistance, but their offerings may not match the hands-on, holistic approach of financial planning professionals.
Choose Specific Financial Assets
Most robo-advisors are limited in their types of available investments. These services may not work if you want to pick specific investments, such as individual stocks, bonds, currencies, or options. Robo-advisors are also less likely to offer any exposure to less common instruments like peer-to-peer lending, master limited partnerships, or closed-end funds. That said, an investor has many robo-advisors to choose from. A few robo-like advisors specialize in offering more flexibility. Some traditional brokerages like Charles Schwab have begun offering automated services alongside more traditional brokerage accounts.
Beat the Market
Most robo-advisors follow an index fund investing strategy. That means that they’ll closely match market performance. However, they won’t beat it. Some services, like Betterment’s Smart Beta strategies, have unique algorithms that try to beat the market, but they haven’t been around long enough to be proven or disproven. Then again, human advisors also have a spotty record when it comes to beating the market. For example, if the broader stock market goes up 10% in a given year, a stock portfolio with a robo-advisor would likely profit about 10% (minus fees). Keep in mind that many robo-advisors also invest in other assets, like bonds or precious metals, so you’ll have to account for the performance of each of those markets to estimate your robo-advisor returns.
