Robo Advisors – 5 Advantages to Automated Investing
The main advantage of robo-advisors is that they are low-cost alternatives to traditional advisors. By eliminating human labor, online platforms can offer the same services at a fraction of the cost. Most robo-advisors charge an annual flat fee of 0.2% to 0.5% of a client's total account balance.
Advantages of Robo-Advisors
Robo-advisors work well for people who need at least some help with their investing portfolio. And those who need a lot of expertise will likely find robo-advisors to be valuable.
The Benefits of Using Robo Advisors
“The diversification provided by robo-advisors isn't super powerful.” While robo-advisors provide exposure to the broad stock market, even with rebalancing and tax-loss harvesting, you're at risk of losing money.
This is generally not possible with robo-advisors, which can only make generalized decisions regarding portfolio allocation. They cannot dispense tax or legal advice and also won't keep their clients updated on the latest tax information or estate planning strategies.
Best Robo-Advisors:
Robo-advisors will fail because most of them are not profitable. In order for a robo-advisor to be profitable at a 0.25% fee, they would need to have somewhere between $15-20 billion assets under management (AUM).
Robo-advisor performance
Robo-advisor | 2.5-year annualized return |
---|---|
SoFi | 4.03% |
TD Ameritrade | 3.62% |
TIAA | 4.20% |
Vanguard | 3.42% |
While simplicity and ease are robo-advisors' top-selling points, they're not right for every strategy. Yes, beginners should invest in low-cost, broad-market index funds. But as you get older, and your investment strategy becomes more sophisticated, you might want more options and flexibility than a robo can deliver.
Robo-advisors manage $460 billion, and the robo-advisory industry is expected to grow to $1.2 trillion by 2024. Interest and support from millennials and Gen Z helped robo-advisors rise to prominence.
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