By Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity as featured in Kiplinger
For many folks, robo advice can likely be fine. It’s inexpensive and easy … but also a little one-size-fits-all. More complex financial situations may need a human touch.
Robo-adviser platforms began to emerge in 2008 during the Great Financial Crisis. The initial hype created widespread speculation that they would replace traditional human financial professionals.
However, the idea has since faded, and many of the original entrants in this space have either been acquired or shut down. Today, most of the remaining robo-adviser platforms are run by the largest and most well-known U.S. asset managers, with only a few independent providers remaining.
As of November 2024, Vanguard runs the largest robo-adviser platform, with $333 billion in assets under management (AUM) and 805,000 users. Betterment and Wealthfront round out the top three robo-advisers.
Many investors question whether a robo-adviser is right for them. This article explores the pros and cons to consider when comparing whether you should try a robo-adviser or work with a traditional financial planner.
The benefits of robo-advisers
Traditionally, robo-adviser platforms offer portfolio management and rebalancing for a low fee. Robo-advisers typically offer low account minimums and charge less in fees than financial advisers.
For example, Vanguard, known for its low-cost mutual funds, charges 0.15% (or 15 basis points) on assets under management (AUM) in its basic digital robo-adviser program. Betterment, another major platform, charges 0.25% for its service.
In these cases, investors are mostly paying for a model portfolio, a collection of five to eight exchange-traded funds (ETFs) curated based on a predefined investment strategy, and automated trading of that portfolio.
For investors who aren’t comfortable constructing a portfolio on their own but don’t need personalized financial planning, robo-advisers can be an attractive solution. Some robo-adviser platforms also advertise tax-loss harvesting, but this feature is often limited to larger account minimums.
Additionally, many robo-advisers offer mobile applications, making it easy for investors to manage their accounts, monitor account balances and track performance. The onboarding process is typically quick and walks the investor through a risk tolerance questionnaire to fit them with a recommended asset allocation.
Based on the investor responses, they may be assigned an aggressive growth strategy, a balanced portfolio or a conservative allocation. Once that allocation is approved, the funds are normally invested in low-cost ETFs or mutual funds and then rebalanced as needed.
One benefit of a robo-adviser for investors is access to institutionally designed portfolios that may be more diversified than what they would have built themselves. Therefore, managing risk is also a key benefit of the robo-adviser experience.
The downsides of robo-advisers
While robo-advisers are low-cost and easy to use, they come with limitations. Their simplicity often means they are unable to handle complex financial situations.
For example, an investor with multiple accounts who wants to take advantage of more advanced asset location strategies, such as placing equities in a Roth IRA and more tax-efficient assets in a taxable account, may find a robo-adviser platform inadequate.
Similarly, investors with more complex asset allocation needs won’t be well-suited for a robo-adviser.
