Robo-advisors are well known for offering lower fees than their human counterparts. Robo-advisors are computer algorithms that generate financial advice for consumers. Offered mainly by small startups a little over a decade ago, the robo-advisor industry has since swept the market for financial advice and planning.
Robo-advisor fees are listed as a percentage of the assets under management. Typical fees range between about 0.20% to 0.30% annually. So that means if an investor puts in $1,000 into a robo-advisor, he or she generally pays between $2 and $3 per year to have the robo- advisor manage his or her money. The amount of money an investor puts into the robo-advisor, or the minimum balance, also often dictates how much the fee rate is.
The popularity of robo-advisors has meant many competitors have entered the space. More traditional financial firms such as Fidelity, Schwab and Vanguard also now offer robo-advisory services in addition to their traditional money-management businesses. Such competition has created a wide range of fees and tiered fee structures for investors to choose from.
What Are Robo-Advisors?
Consumers have flocked to robo-advisors, mainly because of how they can get guidance on financial planning and types of investment risk for a relatively cheap cost. Here’s how robo-advisors work: their services are typically done online, making them more easily accessible and often less intimidating than the old-school model for financial advice.
Said to have started in 2008, the robo-advisor industry has expanded rapidly. One estimate projects robo-advisors will have $1.4 trillion in assets in 2020 and will grow to $2.5 trillion by 2023. Many financial planners and investors say such figures can grow however. For comparison, the asset-management industry as a whole has $90 trillion.
Another sign of potential is how few Americans get any kind of advice for their financial planning or investment goals. A study showed that 75% of Americans manage their own finances without any professional or online help, while another study found that four in ten workers are guessing what they will need in retirement.
Inexperienced investors in particular may benefit from robo-advisors as they may just be getting started and their investment needs may be more straightforward. Robo-advisors have been popular among so-called millennials, roughly defined as people born between 1981 and 1996. As such millennial investors reach milestones in adulthood, like home buying and looking ahead to retirement, the demand for digital financial advice has ramped up.
How Robo-Advisor Fees Work
Robo-advisor fees are calculated using the expense ratio, which is the percentage of assets subtracted each year for costs associated with managing the investment. Mutual funds and exchange-traded funds (ETFs) also use expense ratios.
In recent years, expense ratios in the asset-management have been pressured lower as cheaper index-tracking competitors have flooded the market. That’s arguably a benefit from ETFs that investors have experienced.
Early robo-advisor pioneers Betterment and Wealthfront both have funds with fees of 0.25% on an annual basis, which is typical for the industry. But investors will encounter a wide range of fees from robo advisors. For instance, M1 Finance and SoFi have no in-house management fees for their robo-advisor services.
Minimum balances requirements can also dictate the level of the management or advisory fees. Personal Capital has a fee of 0.89% annually for the first $1 million invested by the consumer. For different levels above $1 million however, the fee rate is tiered and lower.
Other Factors in Robo-Advisors to Consider
When picking a robo-advisor, investors can consider several factors like minimum balance, historical performance returns, as well as benefits such as access to a human advisor and educational opportunities.
In addition to the management fees, some robo-advisors may have a set-up fee as well. The ETFs that get invested in could have their own expense ratios that get applied to the consumer’s bill. That would be an additional layer of fees. Tax implications may also be a consideration.
Why Robo-Advisor Minimum Balances Are Important?
Minimum balances are important in the asset-management industry because they can be the gate-keeper to individuals who want to entrust money with a financial advisor. Traditional asset management often have large minimum balance requirements for clients. At the high end, private wealth managers could require minimums of $5 million.
The lower minimum balances by robo-advisors have made them easier to use for individuals, particularly younger users who may not have yet grown their investable assets.
The minimum balances are also intrinsically tied to how robo-advisors mainly make money, since the annual management fees is a percentage taken from the robo-advisors assets under management. All the balances of consumers will add up to become a robo-advisor’s total assets.
Robo-Advisor Fee Comparison
Here are the fees and tiered fee structures of some robo-advisors compiled by Backend Benchmarking , a Martinsville, New Jersey-based firm that follows the robo-advisor industry.
The data was in the third-quarter 2020 edition of Backend Benchmarking’s Robo Report, which has been cited by numerous business publications.
|Acorns||$1/month for Acorns Invest; $3/month for Invest + Acorns Later + Acorns Spend; $5/month for Acorns Family.||No minimum|
|Ally Financial||0.30% annually; no management fee for cash-enhanced portfolio||$100|
|Axos Invest||0.24% annually if $500 or over. For balances under $500, a $1/month fee applied.||$500|
|Betterment||Digital: 0.25%; Premium 0.40%; Above $2 million: 0.30%||Digital: no minimum; Premium: $100,000|
|Ellevest||$1/month; $5/month; $9/month based on tier level||Digital: no minimum; Private Client: $1 million|
|Fidelity Go||Digital only: no fee for balances less than $10,000; $3/month for balances between $10,000 and $49,999; 0.35% annually for balances $50,000 and above; 0.50% for Personalized Planning & Advice||Digital only: no minimum; Personalized Planning & Advice: $25,000|
|M1 Finance||No advisory fee||$100 for taxable accounts; $500 for retirement accounts|
|Personal Capital||0.89% annually for first $1 million; lower for different tiers above $1 million||$100,000|
|Qapital||Complete: $6/month; Master: $12/month for additional features||$10|
|Schwab||Intelligent Portfolios: No fee (digital only); Intelligent Portfolios Premium: $300 initial planning fee, $30/month subscription||Intelligent Portfolios: $5,000; Intelligent Portfolios Premium: $25,000|
|SigFig||No fee for first $10,000; 0.25% annually for balance over $10,000||$2,000|
|SoFi||No management fee||$1|
|TD Ameritrade||Essential Portfolios: 0.30% annually; Selective Portfolios: tiered at higher fee levels||Essential Portfolios: $5,000 or $500 if automatic recurring deposits are set up; Selective Portfolios: $25,000|
|Titan Invest||1% annually for $10,000 or more; $5 monthly for $10,000 or less||$100|
|Vanguard Digital Advisor||0.20% annually||$3,000|
|Wealthsimple||Basic: 0.50% fee on $100,000 or less. Black: 0.40% on $100,000 or greater||Basic: no minimum; Black: $100,000|
|Zacks Advantage||0.70% on accounts less than $100,000; 0.50% between $100,000 and $250,000; 0.35% on $250,000 and above||$25,000|
Source: Backend Benchmarking
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Robo-Investing For High-Net-Worth Individuals
The table above shows several examples of tiered fee structures where robo-advisors have higher minimums. Such robo-advisors may be targeting high-net-worth individuals (HNWI), or investors who have a liquid net worth of $1 million or more.
Traditionally, HWNI have been targeted by private wealth managers but robo-advisors have also marketed to them, particularly millennial HNWI. Robo-advisors can be an automated alternative to the face-to-face tailored financial advice and planning that private wealth managers typically offer to such consumers.
Robo-advisors are famous for their rock-bottom fees. However, investors will find that there’s actually a big range in costs and how robo-advisors charge for their services. The minimum balances investors are required to make can set what sort of fees investors pay. Investors could also pay additional fees for the cost of investing in ETFs and a potential set-up payment.
When choosing a robo-advisor, consumers can take a holistic approach and look beyond the management fee for services such as portfolio rebalancing, tax-loss harvesting and educational opportunities.
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