Robo-advisor services are known for offering lower fees than traditional brokerages, but the cost of investing with an automated platform also includes underlying expenses investors need to consider. In addition, different robo platforms may charge different fees.
Robo-advisors are computer algorithms that generate automated portfolios for consumers. Robo-advisor fees are listed as a percentage of the assets under management, but also include the expense ratios of the funds in the portfolio, as well as any brokerage fees.
Typical management fees range between about 0.20% to 0.30% annually, and investment costs add on roughly another 10 to 50 basis points. The amount of money an investor puts into the robo-advisor, or the minimum balance, also often dictates how much the fee rate is.
Understanding How
Here’s how robo-advisors work: While the term robo-advisor can mean different things depending on the company that offers the service, investors usually fill out an online questionnaire about their financial goals, risk tolerance, and investment time frames.
On the back end, a computer algorithm then recommends a portfolio of different securities based on those parameters. The portfolio is pre-set, typically with an allocation that’s either more aggressive or more conservative based on the person’s preferences.
A portfolio for someone nearing retirement age would typically have a different allocation versus a portfolio for someone in their 20s, for example. Depending on these details, the service might automatically rebalance the portfolio over time, execute trades, and may even conduct tax-loss harvesting. SoFi’s automated portfolio does offer automatic rebalancing, but not automatic tax-loss harvesting.
First launched in 2008 or 2009, the robo-advisor industry has expanded rapidly in the last 15 years. Assets under management in the U.S. robo-advisor market are projected to reach about $2.76 trillion in 2023, according to Statista (estimates vary). For comparison, the asset-management industry as a whole has $90 trillion.
How Robo-Advisor Fees Work
Robo-advisor fees are calculated using the expense ratios of the underlying funds, and the percentage of assets subtracted each year for costs associated with managing the investment.
In recent years, expense ratios in the asset-management world have been pressured lower as cheaper index-tracking competitors have flooded the market. That’s arguably a benefit of ETFs that some investors have experienced.
Today’s robo-advisor platforms generally charge management 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, owing to the investments used by that company to build their portfolio offerings.
Expense ratios can range from a few basis points to half a percentage point on top of the management fee.
Minimum balance requirements, as well as additional features like automated rebalancing or access to a live advisor, can also play into the cost you’re going to pay.
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Other Factors to Consider About Robo-Advisors
When picking a robo-advisor, investors can consider several factors like minimum balance, historical performance returns, as well as benefits such as automated rebalancing, and access to a human advisor (which is typically limited on these platforms, or depending on how much money you’ve invested).
In addition to the management fees, some robo-advisors typically charge a brokerage and a set-up fee as well. The ETFs within each portfolio have their own expense ratios that add to the cost of investing.
Tax implications may also be a consideration. Some robo platforms offer automatic tax-loss harvesting, which may help a portfolio to be more tax efficient.
Why Are Robo-Advisor Minimum Balances 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 firms often have large minimum balance requirements for clients. At the high end, private wealth managers could require minimums of $5 million.
The reason being that traditional wealth management advisors offer their clients a well-coordinated team of professionals (e.g. tax accountants, estate planners, and so on).
The opposite is true of automated platforms. Robo advisors rely on an algorithm, charge lower fees and have lower minimums, but they provide few, or very limited additional services other than the automated porfolio itself.
The lower minimum balances of robo-advisors have opened the door for newer or younger investors who may not have yet grown their investable assets, and whose financial needs may not be complex.
The minimum balances are also intrinsically tied to how robo-advisors make money, since the annual management fees is a percentage taken from an investor’s assets under management. The automated portfolio, which is usually made up of low-cost index funds an ETFs, also includes the expenses of those underlying funds.
Robo-Advisor Fee Comparison
Here are the fees and tiered fee structures of some robo-advisors compiled from the fourth-quarter 2022 edition of Backend Benchmarking’s Robo Report, which has been cited by numerous business publications. All data as of 12/31/22.
| Robo-Advisor | Advisory Fees (does not include expense ratio of underlying funds or other costs) |
Minimum Balance |
|---|---|---|
| Acorns | $3/month for Personal $5/month for Personal Plus |
No minimum |
| Ally Financial | 0.30% annually; no management fee for cash-enhanced portfolio | $100 |
| Axos Invest | 0.24% | $500 |
| Betterment | $4/month or 0.25% annually for $20,000 on deposit (or $250 monthly deposits); 0.40% for premium | Digital: no minimum; Premium: $100,000 |
| E*Trade Core | 0.30% annually | $500 |
| Ellevest | $5 or $9/month based on tier level | Digital: no minimum; Private Client: $1 million |
| Fidelity Go | no fee for balances less than $25,000; 0.35% for balances $25,000 and above | $10 minimum; access to live advisory services: $25,000 min. |
| FutureAdvisor | 0.50% | $5,000 |
| Personal Capital | 0.89%; tiered pricing at higher asset levels | $100,000 |
| 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 advisory fee | $1 |
| TD Ameritrade | Automated Investing: 0.30% plus minimum account fee of $75/year. Automated Investing Plus: 0.60% plus minimum account fee of $250/year | Automated Investing: $5,000; Automated Investing Plus: $25,000 |
| Titan Invest | 1% annually for $10,000 or more; $5 monthly for $10,000 or less | $100 for Titan Flagship; $10,000 for Titan Opportunities and Titan Offshore |
| USBank Automated Investor | 0.24% | $1,000 |
| Vanguard Digital Advisor | 0.20% annually [includes underlying fund fees and management fees] | $3,000 |
| Wealthfront | 0.25% annually | $500 [some portfolio features may require a higher minimum] |
| WellsFargo | 0.35% [discounted pricing may be available] | $500 |
| Zacks Advantage | 0.70%; discounted tiered pricing with higher deposits | $25,000 |
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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.
The Takeaway
Robo-advisors are famous for their rock-bottom fees. However, investors will find that there’s actually a wide range in costs and how robo-advisors charge for their services. The minimum balances investors are required to make can determine what sort of fees investors pay. Many robo platforms offer tiered pricing, depending on how much money is on deposit.
Investors will also pay additional fees for the cost of investing in ETFs and a potential set-up payment. Investors often pay extra for services such as portfolio rebalancing, tax-loss harvesting and educational opportunities.
Both experienced and novice investors can try robo-advising, and automated platforms may support a range of short- or long-term goals. SoFi Invest offers both active investing and automated investing options.
Advisory services provided by SoFi Wealth LLC, an SEC-registered investment advisor.
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