Can You Have Multiple Robo Advisors? And, Should You?


Robo advisors have nominal fees and low account minimums. The convenient entry threshold may prompt some investors to consider more than one robo advisor. However, the costs involved escalate as you increase the assets under the management of one or more robo advisors. 

You can have multiple robo advisors. However, you may encounter some complications. Multiple robo advisors offering distinct recommendations and conflicting suggestions can perplex you instead of simplifying your passive investment strategy.

Robo advisors have the same purpose, to assist beginners and passive investors. However, the modus operandi of all robo advisors isn’t identical; neither are the policies nor the algorithms. Besides, some robo advisors have add-on or other service charges, such as trading fees.

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When Can You Have Multiple Robo Advisors?

A new investor may prefer trying a few robo advisors to test their services. An investor with a managed portfolio may want to explore alternatives to learn if better options exist. 

Comparing services is a practical and wise tactic. 

You can have 2 or more robo advisors since most don’t cost a fortune, and there’s no significant financial threat. Also, you may want to deal in different portfolios, indexes, funds, themed investments, stock types, or bonds, with different robo advisors which is easier with multiple robo advisors. 

Caveat: Using multiple robo advisors may or may not be ideal as a perennial strategy.

Why It’s Okay To Have Multiple Robo Advisors?

The following explains why you can have multiple robo advisors:

  • $0 account minimum. You’ll have plenty of options with a $500 to $5,000 minimum balance.
  • Some robo advisors have 0.00% advisory fees. Others charge 0.25% or more.
  • Advisors have $0 trade fees and no add-on charges.
  • There’s no lock-in period or early withdrawal penalty.

Caveat: Some robo advisors may have service charges, such as add-on and trade fees, not revealed at the outset. Exercise diligence to find out all relevant details before signing up with any robo advisor.

When It’s Not Okay To Have Multiple Robo Advisors?

Robo advisors aren’t designed to take unnecessary risks. Most robo advisors are restricted to passive investing and not active trading.

Beating the market isn’t their objective. Mirroring the market, indexes, exchange-traded funds, and rewarding portfolios is the primary focus.

Hence, if the applicable benchmarks don’t suit your investment priorities, using one or multiple robo advisors is irrelevant. Likewise, if the passive investment benchmarks aren’t yielding the returns you desire, having one or numerous robo advisors won’t make much difference.

Don’t consider multiple robo advisors in the following scenarios:

  • You’ve just lost a substantial sum of money with or without a robo advisor.
  • You presume that it’s helpful to compile recommendations from many robo advisors.
  • You want to avoid putting all your eggs in one basket.
  • You believe multiple robo advisors can foil your losses or boost earnings.

Now, let us review each of these circumstances in some more detail.

You’ve Lost a Substantial Amount of Money 

A worse tragedy is a desperate response, taking more risks and thus expanding your financial exposure to further potential losses. Prioritize risk mitigation and consolidating your investments into a safer portfolio than experimenting with unfamiliar services, like several robo advisors.

Robo Advisors Don’t Use Identical Algorithms

Robo advisors have similar modi operandi, but algorithms aren’t identical. Thus, the recommendations may be distinct. Passive investors may not have the firsthand market knowledge to compile all such suggestions to infer one actionable course.

Multiple Robo Advisors Don’t Facilitate Diversification

Some robo advisors are better than others, but all are into passive investing. Explore both passive and active investing to avoid putting all your eggs in one basket truly. Invest in indexes and ETFs and consider stocks, bonds, and the bouquet of money market instruments.

Robo Advisors Aren’t Active Wealth Managers 

Foiling losses or boosting earnings, like through shorting or options, aren’t for passive investors or beginners. Having multiple robo advisors doesn’t necessarily foil potential losses, increase profits, and enhance or mitigate your risks. Optimally leveraging your passive and active investments is the key, not the number of robo advisors.

The Reality of Using Multiple Robo Advisors

You can have multiple robo advisors for educational or informative purposes. And, you can use the available resources, tools, and constant supply of recommendations to improve your understanding of passive investing. 

Also, you may compare the actual execution of different robo advisors’ versions of the modern portfolio theory, automatic rebalancing, tax-loss harvesting, and fractional shares. 

Robo advisors aren’t financial experts. The algorithms are written by coders using domain and subject matter inputs from asset management companies, wealth managers, and financial advisors. Most algorithms rely on traditional or contemporary economic models.

If multiple robo advisors have the same model and run similar algorithms, all of them may lead to an identical outcome. The user experience may vary, though. It’s difficult to gauge what a robo advisor actually does or how it operates unless you try it.

Hence, you can test the waters, but similar strategies of multiple robo advisors won’t have much variance in your immediate earnings, risk mitigation, or long-term gains.

However, you may encounter problems if the economic models or financial, trading, and investment theories of 2 or more robo advisors conflict. You’ll lack clarity, and your actions may emanate from inadvertent perplexity and potential misinterpretation.

A fitting example is the efficient market hypothesis, among other theories.

CAPM, MPT, EMH, and Other Theories

In 2013, 3 people won the Nobel Memorial Prize in Economic Sciences for the same reason, empirical analyses of asset prices.

Interestingly, 2 of these 3 Nobel laureates, Eugene Francis Fama and Robert James Shiller, represented contrasting views on market efficiency following their empirical analysis.

Fama concluded that markets are efficient. Shiller contradicts that the markets are inefficient. 

Both concede to an identical ultimate reality that the financial markets can determine the right asset price.

A leading robo advisor, Betterment uses Fama’s asset pricing theory co-developed with Kenneth Ronald French, known as Fama & French Three-Factor Model. However, this isn’t the only model robo advisors use.

The capital asset pricing model (CAPM) that served as the foundation of the Fama-French Model is still in use. The modern portfolio theory (MPT) for asset allocation uses the mean-variance model of Harry Max Markowitz, for which he won a Nobel in 1990.  

The Black–Litterman model influences portfolio management in contemporary markets. Robo advisors also use the risk parity model among many other lesser-known theories and hypotheses.

There are relatively newer theories, such as the instability index of the financial time series and genetic algorithms. This approach aims to replace the mean-variance and risk parity models used by robo advisors for exchange-traded funds, and in general, for stocks and bonds.

If or when you use multiple robo advisors, your passive investment will be effectively influenced by one or more models used by the algorithms. Such policies pose a few fundamental questions:

  • How would you know which model is at play?
  • How will an investor conclude one model’s efficacy over another’s?
  • What happens when multiple theories, complementing or contrasting, are in action?

These may appear to be hypothetical questions, but they’ll become relevant if too many theories or models influence your investments. Like all financial investment strategies, one particular robo advisor doesn’t suit everyone. Similarly, one model or theory may not be fitting for all investors.

Robo advisors are for passive investors that don’t prefer active investment or portfolio management. 

There’s no real financial advisor actively managing your interests and no human intervention, either. Thus, relying on too many automated generic recommendations can potentially backfire. Besides, robo advisors don’t offer 100% personalized suggestions or guidance.

An investor’s broader objectives and the intricate market realities may be worlds apart, especially in volatile times. A completely hands-off approach isn’t ideal when the tides are rough, even for passive investments. 

The risks may be compounded when your dependence is on more than one robo advisor.

Author’s Recommendations: Top Trading and Investment Resources To Consider

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Conclusion

The fundamental objectives of passive investments are secured return and the least risk. There’s no hazard in having multiple robo advisors if you can eliminate risk and ensure a return. 

However, don’t increase your financial exposure unnecessarily or beyond your appetite. Always mitigate risks irrespective of the number of robo advisors at your discretion.

Keep a proactive check on advisory charges, trade fees, and other financial obligations if or when you consider 2 or more robo advisors. You don’t want unforeseen costs springing a surprise, definitely not from multiple robo advisors at around the same time.

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    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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