Are Robo-Advisors Worth It?

Are Robo-Advisors good enough at what they do?

As most regular readers of this financial planning blog know, I used to be a professional Certified Financial Planner for several years. That gives me a lot of insight into just what a financial advisor does and does not do for their clients, and how much that is worth.

Susie Orman is a former financial planner who decided that the whole profession was basically rubbish. Other former financial advisors are now out there saying that these professionals are indispensable. The truth, as with most things lies somewhere in between. So, how does a robo-advisor stand up to a real financial advisor? Are robo-advisors safe? And, most importantly, are robo-advisors worth it?

What Is Robo-Advisor?

Let’s start with getting some facts straight. First, robo-advisor is a fancy, sensational term for bold headlines. The reality is that the so-called robo-advisors are just computer programs that build an investment portfolio, usually out of mutual funds and ETFs, for you. There are no robots sitting behind desks anywhere (although that would be cool.)

Second, a robo-advisor isn’t an advisor or financial planner so much as an investment manager.

Robo-Advisor vs Financial Planner

The reason these things matter is because, unlike most people’s perceptions, investing your money is not the most important thing a typical financial advisor does.

The days of a fast-talking New York broker calling you and screaming, “Buy!” or “Sell!” into the phone are pretty much over. For almost everyone without a million-dollar portfolio, the only thing your human financial planner will ever do with your money is put it in mutual funds or exchange-traded funds (ETFs) which will handle the buying and selling of stocks for you.

Robo-Advisor Best at Investing Without Coaching

So are roboadvisors worth it? Believe it or not, many advisors don’t have that much variety in their investments between customers. Most advisors working with clients that have less than $1 million of investable assets aren’t out there determining which mutual funds are best for you specifically. Instead, they determine which mutual funds are the best to use for their customers overall, and then slot each individual into those funds using individual percentages. If you and a friend have the same advisor, compare your portfolios someday. You’ll see a lot of the same investments, even if the percentage amounts in each investment are different.

Check this out to see if Credit Karma is legit.

A robo-advisor does essentially the same thing. A company, such as Acorns investments, uses whatever method they think works best, selects a portfolio of investments to be used by the robo-advisor. This field of investments is the same for all clients. What changes is what percentages of your money goes into each investment. Then, certain investments are added or removed, for more or less risk tolerance.

For example, if you are young, and profess a high-risk tolerance, you might get an aggressive portfolio at SoFi invest, with a specific small-cap international fund, or a micro-cap fund. On the other hand, if you are nearing retirement and profess a low-risk tolerance, those funds will not be in your portfolio at all. We recently reviewed Acorns, an app that transfers small amounts of money into an investment account run by a robo-advisor. Your funds are all invested in pre-chosen portfolios run by a computer, or robo-advisors.

Now, neither the robo-advisor, nor the human advisor, have a single portfolio used by everyone, but you’ll find a small stable of investments used among most of their clients.

Note that this all changes once you have more than approximately $1 million worth of investable assets. At this point, certain financial advisors start calling themselves wealth managers, and they will build portfolios for you out of individual stocks.

The reason for this is two-fold. First, at about this dollar amount, you can buy enough individual stocks to achieve the proper diversification for a smart portfolio. Second, at about this amount, your financial advisor needs become a lot less about financial planning, and a lot more about making the money you already have earn more. (Think about it. If you have a million dollars out there being invested, do you really need a plan to pay for your kid’s college education? Just use some of your money. That’s your plan.)

To get enough diversification from individual stocks with a smaller amount of investable assets, you need one of the mini-brokerages like Wealthfront, Betterment, or Robinhood, that let you buy fractional shares.

Which Is Better Robo-Advisor or Human Financial Advisor?

Is a Robo-Advisor Safe?

Overall, the robo-advisors are safe. They are likely to have better investment returns than human advisors over a long period of time, but only because human advisors charge higher fees.

As long as you aren’t using bozo-style mutual funds, the difference, over the long-term, in diversified investment portfolios is often relatively small. This is sort of the point of diversification, and dollar-cost averaging, to take some of the volatility out of investing. However, the constant drag of higher expenses should make robo-advisors out-perform higher priced human advisors over time.

However, that out-performance may be relatively small. Especially for people without a large investment portfolio, saving the right amount, the right way, is far more important than how much money your investments return. A person starting at zero, earning just 7% but saving 10% into their 401k will have oodles more money upon retirement than someone earning 10% but only saving 7%.

Mistakes along the way like borrowing from your 401k or withdrawing early from an IRA will cost you much more than high fees. Ironically, these are exactly the kinds of things a human advisor can sit down and help you avoid, and THAT is what makes a human advisor worth it compared to a roboadvisor.

In the end, whichever kind of advisor actually makes you get started saving and investing is the right one for you. If you are the kind of person who will open an account at 2:00 in the morning because you can’t sleep but won’t call to schedule an appointment with a human, then go with a robo-advisor.

If you’re the kind of person who is afraid to hit submit because you want someone to double-check your work, then go with a human advisor. Same thing if you have been meaning to open a college fund, or IRA, for more than a year — you obviously are not going to do it on your own. Admit that. Own it and let someone get it started for you.

Robo-Advisor List

We look at how good roboadvisor investments are in some of our robo-advisor reviews. These include Stash Reviews, Acorns Reviews, SoFi Reviews, Wealthfront Reviews, and Betterment Reviews.

SEC and Robo-Advisors

Make sure there is no robo-advisor scam going on. There was an SEC bulletin about robo-advisors.

Frequently Asked Questions

Are Robo Advisors Worth It?

Robo advisors use many of the same investment strategies as other financial advisors, often for a lower cost. If you can find a robo-advisor that uses an investment methodology you like for less than a standard advisor, then a robo advisor is worth it.

How Good Are Robo Advisors?

If you imagine a computer program buying and selling at a moment’s notice while slinging shares in your account to traders around the world, you should reign in your expectations. Most robo advisors are programmed solely to invest any cash in the account and then sell based upon your asset allocation changing, and maybe for some tax-loss harvesting. Otherwise, the robo advisor is only as good as its methodology.

How Much Money Can You Make with Robo Advisors?

Robo advisors are not magic. So, as always, it takes money to make money. Remember compound investing takes time to work. A 100% annual return turns your $10,000 investment into $20,000 but it won’t help you buy a yacht. The best robo advisors are designed to keep your portfolio invested with a certain asset allocation while taking advantage of potential tax benefits.