The average annual fee of robo advisors is around 0.25% of assets under management. Some robo advisors don’t have a minimum investment requirement, but if you have a $5,000 account balance, you pay a $12.50 annual fee. Are robo advisors worth the fee they charge every year?
Robo advisors are irrefutably worth it for passive investors who prefer a hands-off approach. They have the lowest fees in the financial advice & asset management spectrum. However, a robo advisor isn’t worth the fee if and when you can self-manage a portfolio and each investment.
The $0 to low minimum investment requirement has eliminated the entry barrier, and automated portfolio management has empowered investors that cannot afford a human financial advisor. However, robo advisors have limitations, too. Read on to know if robo advisors justify their fees.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
7 Reasons Why Robo Advisors Are Worth the Fee
Passive investing is now simpler, conveniently accessible, and more affordable due to robo advisors.
Some robo advisors like Schwab Intelligent Portfolios don’t charge any annual advisory fee. You can build a customized investment portfolio, avail automated services like rebalancing and tax-loss harvesting, and explore cash deposits at Schwab Bank.
The 0.25% to 0.40% annual fees have a proportionate and cumulative effect on your net assets under management. A 0.30% annual fee on a $100,000 investment is $1,500 in five years. Hence, you must weigh the benefits of using a robo advisor.
Described below are the key reasons that make robo advisors worth the fee.
Turnkey Investment Planning & Management
Robo advisors are a turnkey solution. You can sign up and create an account instantly. The algorithm and all available resources are at your disposal as soon as you get started, albeit subject to profile completion and subsequent personalization in some cases.
Many robo advisors are backed by established wealth management companies. Hence, the investment and portfolio management policies are determined and influenced by experienced financial advisors. The expertise and resources are routed through an automated service, but the foundation is valuable.
The singular element of backing by a Charles Schwab or a Vanguard makes a robo advisor and its annual fee worthwhile. The same companies charge much more for actively managed funds and in-person financial advice.
Furthermore, most robo advisors use modern portfolio theory and other financial models to manage entire portfolios and specific investments. Leveraging a tested investment strategy is better than not having any plan at all.
The Power of Fractional Shares
Robo advisors primarily deal in low-cost ETFs, stocks and bonds. Some robo advisors facilitate cash investments, too. Sufficient options exist, but some passive investors may not have the required capital to explore multiple funds, stocks, or bonds simultaneously.
Many funds have minimum investment stipulations. Some desirable stocks may have a high real-time share price when investors want to include them in their portfolios. Fractional shares empower individual investors to own a part of stocks or funds despite not paying for the minimum unit or holding.
More Affordable Than Available Alternatives
Financial advisors charge annual advisory fees or commissions. You’ll pay both in many cases.
Some financial advisors have a flat fee, not a percentage of the assets under management. Active investing through an asset management company with a financial advisor on board has several costs involved.
Passive investing has two popular options: robo advisor and DIY. The latter doesn’t involve an annual fee for a service provider, but you’ll still pay the expense ratio. All ETFs have annual expense ratios and trading fees. Some companies may waive off the trading charge or commission in a few instances.
However, direct passive investing doesn’t offer you any financial management or personalization. When you invest in an ETF, say through Vanguard or Schwab, it’s a one-time transaction. The company isn’t obligated to manage your entire portfolio or investments other than the chosen asset.
A robo advisor helps you decide if you should invest in particular funds, how long you should hold those assets, and when you must exit. The service suite of most robo advisors is comprehensive and intended to achieve your short-term and eventual financial objectives.
Diversified Portfolio With Risk Mitigation
Passive investing isn’t limiting. You can explore the entire bouquet of passive investment options, either directly or through robo advisors.
If you tread this path alone, you have to study everything and diversify your portfolio proactively. This arduous process is taken care of by robo advisors.
Passive investors may not have the necessary exposure, market knowledge, and real-time information to assess or mitigate risk.
Robo advisors are responsible for net assets under management worth billions.
0.15% or 0.25% up to 0.40% per year is reasonable when your investment risks are mitigated using systems that manage millions of other portfolios.
More Personalized Than Target Funds
Generally, robo advisors have an extensive questionnaire. Unlike target funds, your age isn’t the only parameter. You must provide copious information about your personal financial goals and investment preferences, among other details.
Hence, the eventual service is exponentially more personalized. Beyond the initial profiling and asset allocation, real-time portfolio management and investment options are personalized, too.
While you may invest and let a robo advisor keep working on it, your portfolio and assets under management will be under sustained monitoring, scrutiny, risk assessment, and changes to accomplish your financial goals.
Automatic Rebalancing & Asset Allocation
Robo advisors are capable of several valuable functions. Automatic rebalancing & asset allocation or reallocation is among the most consequential.
Passive investors are often pressed for time or don’t have the updates handy to make swift decisions in favor of their portfolio or asset allocation and necessary changes. Robo advisors not only automate this but also personalize the whole process per the predefined mandates of clients.
Automated Tax-Loss Harvesting
Like automatic rebalancing and risk mitigation, tax-loss harvesting or minimizing financial liability emanating from short-term capital gain is a significant benefit of using robo advisors.
One minimization act in a year averting a substantial tax liability can neutralize the reasonable annual fee of a robo advisor and make their services more than worthwhile.
3 Reasons Why Robo Advisors Are Not Worthwhile
Robo advisors aren’t for everyone. Some passive investors may have an interest in portfolio management, trading, and investment strategies. A few robo advisors may have constraints preset by their parent organizations to offer only those portfolios or investment options managed by them.
You must decide the reasonability or viability of a robo advisor depending on your needs, how much time and resources you can spare to manage your passive investments, and if the net expenditure is worthwhile vis-à-vis the returns.
Limited Investment Basket
Schwab Intelligent Portfolios may be limited to Schwab ETFs if Charles Schwab has such a policy. Vanguard may do something similar. Robo advisors not backed by traditional asset management companies may also have some limitations.
Passive investors aren’t totally free to choose any investment option or assets in their portfolio. All robo advisors have a basket, and they can only offer options from within that scope. This limitation may also apply to cash deposits.
Schwab Bank facilitates FDIC-insured deposits for cash investments of the clients using their robo advisor. However, the company acknowledges that alternatives beyond their program may yield higher returns, albeit the risks and terms vary.
Some investors may find these limitations shackling and infer that a robo advisor’s annual fee is not worth it.
Impact of Expense Ratio
The annual fees of robo advisors don’t replace the expense ratios of ETFs. Hence, you must add the annual fee and the expense ratio to calculate the net expenditure per year to have a specific amount invested in a particular fund, managed through a robo advisor.
However, you should note that all other asset management and financial advisory services also have an expense ratio. The annual service charges of these alternatives coupled with the expense ratios make for a much higher yearly expenditure than with a robo advisor’s fee.
Affordable Alternatives
There are two affordable alternatives to paying the annual robo advisory fee. These are:
- DIY: You plan, research, personalize, compare, decide, and execute every investment. You’ll still pay for the applicable expense ratios and commissions for every ETF and trade.
- Target funds, bonds, cash deposits, and some other money market instruments may have a lower net expenditure than an ETF’s expense ratio and a robo advisory fee combined.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Robo advisors have nominal annual fees, and some don’t even charge that. Consider the annual fee, expense ratio, and applicable commissions to calculate your yearly and subsequently cumulative expenditure. Weigh the costs against the services & returns to decide.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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