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Guide to Understanding and Tracking Robo-Advisor Returns

By Michael Flannelly · February 03, 2023 · 5 minute read

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Guide to Understanding and Tracking Robo-Advisor Returns

Investing can be complex and intimidating, so many people may seek an advisor to help them with their finances. In the past, that meant going to a financial advisor to get a tailored financial and investment plan, usually at a high cost. But in recent years, consumers have gravitated toward robo-advisors – which provide algorithm-generated investment advice to help individuals manage their money – due to their low fees and convenience.

However, even with the help of a robo-advisor, you need to understand and track the returns on your investments. In this guide, we will explain what robo-advisors are, how they work, and what you need to know about monitoring and evaluating the performance of your portfolio. By understanding the basics of robo-advisors and their returns, you can make more informed decisions about your investments and achieve your financial goals.

How Robo-advisors help investors

A robo-advisor is an automated, algorithm-based service that provides investors with financial advice. The service typically involves a questionnaire that customers complete to assess their risk tolerance and investment goals. It is then used to determine an investment strategy and portfolio of exchange-traded funds (ETFs) or other low-cost investments.

Robo-advisor algorithms typically use modern portfolio theory (MPT) and other quantitative techniques to create a diversified portfolio tailored to the investor’s needs. The algorithms used by robo-advisors are constantly updated to reflect changes in the market and make adjustments as needed to maintain the desired asset allocation.

Robo-advisors also offer tools to help investors make decisions about their finances. These can include portfolio analysis tools, risk tolerance assessment tools, and educational resources. Investors can use these tools to monitor their portfolios and make informed decisions.

Robo-advisors typically charge a fee for their services, usually a percentage of the total portfolio value. However, the fees are generally much lower than those traditional financial advisors charge.

The goal of robo-advisors is to provide a low-cost and convenient investing option to a wide range of customers, including those who may not have the resources or desire to work with a human, financial advisor.

Recommended: What Is Automated Investing?

Evaluating Robo-Advisor Performance

Evaluating the performance of a robo-advisor is critical for investors interested in using them to build wealth. By looking at the past performance of robo-advisors, investors can get an idea of the sophistication of the computer algorithm that generates the portfolio allocations. Such proprietary algorithms can be based on investment theories developed by Nobel Prize-winning economists.

An investor should evaluate robo-advisor performance by considering its overall returns and several other key metrics. By assessing the following metrics, investors can better understand the robo-advisor’s performance and how it aligns with their investment goals:

•   Returns: Compare the rate of returns of a robo-advisor’s portfolios to those of relevant benchmarks. For instance, investors can look at the returns of their robo-advisor portfolio versus the S&P 500 Index returns. If the robo-advisor performs better than the S&P 500, it may indicate a well-run robo-advisor. However, remember that past performance is not always indicative of future results, but it can provide a general idea of how the robo-advisor’s investments have performed over time.

•   Diversification: Evaluate the diversification of the robo-advisor’s portfolios within and across different asset classes. Portfolio diversification can help manage risk by spreading investments across different types of securities.

•   Rebalancing: Investigate how often and how the robo-advisor’s portfolios are rebalanced and how frequently the underlying investments are reviewed.

•   Customer Service: Check if the robo-advisor provides access to a human advisor or customer support, as this can be an important factor if you need help or have questions.

What Is the Average Robo-Advisor Return?

The average return for a robo-advisor portfolio can vary depending on several factors, such as the portfolio’s specific investments, the robo-advisor’s investment strategy, and the overall market conditions.

In general, robo-advisors tend to invest heavily in low-cost index funds and ETFs, which often track the broader market. Therefore, a robo-advisor portfolio’s returns may be similar to a mix of comparable index funds minus any management fees charged by the robo-advisor.

Recommended: ETFs vs Index Funds: Differences and Similarities, Explained

Nonetheless, returns can vary widely depending on the robo-advisor and the portfolio. For example, as of September 30, 2022, the 5-year average annual return for robo-advisors with portfolios comprising 60% stocks and 40% ranged from 2.31% to 4.44%, according to The Robo Report by Condor Capital.

Robo-Advisor Returns

Below are the returns of some robo-advisors compiled by Condor Capital’s The Robo Report. The returns shown in the table are of portfolios with a 60% stock and 40% bond asset allocation, after fees, as of September 30, 2022. All returns for periods longer than one year are annualized.

Robo-Advisor Third-Quarter 202 YTD (through 9/30/22) 2-Year 5-Year
Acorns -5.96% -21.19% -1.77% 2.51%
Ally Invest -5.84% -20.31% -1.40% 2.61%
Axos Invest -6.01% -21.43% -1.28% 3.49%
Betterment -6.17% -20.59% -0.60% 2.47%
Charles Schwab -5.78% -18.28% 0.96% 2.31%
E*Trade -6.47% -20.97% -1.55% 2.77%
Ellevest -5.24% -17.70% -0.13% 3.00%
Fidelity -4.91% -19.21% 0.09% 3.79%
Merrill Edge -5.72% -18.61% 0.55% 3.32%
Personal Capital -6.15% -19.54% 1.34% 3.21%
SoFi -4.50% -16.76% -0.62% 3.47%
Vanguard -4.93% -19.47% -0.22% 3.44%
Wealthfront -5.35% -17.08% 3.29% 4.44%
Zacks Advantage -4.02% -17.05% 2.13% 4.25%
Source: The Robo Report by Condor Capital Wealth Management

Understanding Robo-Advisor Fees

Understanding the investment fees associated with robo-advisors and how they compare to other investment options is critical for investors. Fees often eat into a portfolio’s returns, making it harder for investors to build wealth. Analyzing robo-advisor expenses will help investors to determine if the robo-advisor is a cost-effective solution for their investment needs.

Investors can better understand robo-advisor fees by analyzing the following:

•   Management Fees: This is the fee charged by the robo-advisor for managing the investor’s portfolio. It is typically a percentage of a portfolio’s assets under management and many robo-advisors charge less than 0.50%. Some robo-advisors offer management fee-free options to their clients.

•   Expense Ratios: An expense ratio is the fee charged by the underlying funds in the portfolio, such as ETFs. It is expressed as a percentage of the assets, ranging from 0.05% to 0.50% or more. Some robo-advisors include low-cost ETFs with expense ratios under 0.10%.

•   Account Minimums: Some robo-advisors may have minimum account balance requirements. A minimum account balance means investors must deposit a certain amount to open an account, which can be a headwind to opening an account if the investor starts with a small amount of capital.

•   Commissions: Some robo-advisors charge a commission when buying or selling securities, while others do not.

•   Other Fees: Some robo-advisors may charge additional fees for services such as tax-loss harvesting or closing an account.

Pros and Cons of Robo-Advisors

Robo-advisors are often appealing to many investors because of their hands of nature. However, as with any financial product or service, there are pros and cons to using a robo-advisor.

Pros and Cons of Robo-Advisors

Pros

Cons

Relatively low cost Limited personalization
Convenient Insufficient access to human advice
Diversified portfolios Fewer investment options

The pros of using robo-advisors include the following:

•   Low cost: Robo-advisors typically have much lower fees than traditional financial advisors, making them an attractive option for people who want to invest but avoid paying high fees. Some robo-advisors charge as little as 0.25% of assets under management, while traditional financial advisors may charge 1% or more. This can make a significant difference over time, especially for people with smaller portfolios.

•   Convenience: Robo-advisors are available 24/7 and can be accessed from anywhere with an internet connection, which makes it easy for people to manage their investments. This convenience can be especially beneficial for people with limited time to manage their investments.

•   Diversification: Robo-advisors use algorithms to create diversified portfolios with a mix of different index funds and ETFs in various asset classes, which can help investors reduce risk and improve returns.

The cons of using robo-advisors include the following:

•   Limited personalization: Robo-advisors use algorithms to create portfolios, which may not take into account an individual’s unique financial situation or goals. A lack of personalization can be a problem for people with complex financial situations or who have specific investment goals that a robo-advisor may be unable to accommodate.

•   Insufficient access to human advice: Investors may prefer to speak with a human advisor for financial advice and guidance. While some robo-advisors provide access to a financial advisor to help investors, it may not meet the needs of some users.

•   Fewer investment options: Some robo-advisors may have limited investment options compared to traditional financial advisors or a self-directed brokerage account. For instance, robo-advisors tend to invest in ETFs rather than individual stocks. If an investor wants to put money into a specific stock or asset, they may want to open a self-directed brokerage account in addition to a robo-advisor portfolio.

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Can Consumers Lose Money With Robo-Advisors?

Consumers can lose their money with robo-advisors. As with all investments, there’s a risk of investors suffering losses.

There are some precautions that investors can consider when weighing different robo-advisors. The industry is still growing, and computer-generated financial advice may not meet all their needs. In addition, face-to-face meetings can help consumers better understand their financial profile and investment risks.

Also, if a robo-advisor shuts down, consumers may be forced to sell or accept a possibly unrelated replacement service.

Why Do People Use Robo-Advisors?

People use robo-advisors because they are often cheaper than traditional financial advisors, provide a more objective approach to financial decision-making, and offer greater convenience when managing investments.

For example, robo-advisors will automatically rebalance the portfolio according to the market conditions, investors’ risk tolerance, and investment goals. This ease of rebalancing can help investors maintain their desired risk level and ensure that their portfolio stays aligned with their investment goals.

Additionally, some robo-advisors use automated tax-loss harvesting to help investors minimize their tax liability. Tax-loss harvesting is a technique that involves selling investments that have lost value to offset capital gains from other investments, which can help reduce the amount of taxes you owe.

Investing With SoFi

Robo-advisors are a relatively new type of investment service that uses algorithms and technology to create and manage portfolios for investors. In recent years, robo-advisors have become increasingly popular as more and more people look for low-cost, convenient ways to invest their money. This has lowered the barrier to entry for many individuals, including younger people, to start investing.

If you’re interested in using a robo-advisor to help you build your portfolio, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of exchange-traded funds (ETFs) for you based on your goals and risk tolerance. We’ll rebalance your investments quarterly, so your money is always invested how you want it to be. And SoFi doesn’t charge a management fee.

Open an automated investing account and start investing for your future with as little as $1.

FAQ

Do robo-advisors work?

Robo-advisors can be effective tools to help people manage their money and achieve their financial goals. Robo-advisors are generally cheaper and more convenient than traditional human financial advisors. However, it is important to research each robo-advisor to ensure it is the best fit for your needs.

What are the differences between a robo-advisor and a financial advisor?

Robo-advisors are usually less expensive than financial advisors. Robo-advisors typically have low fees and minimum deposit requirements, while financial advisors often require a minimum deposit and charge a percentage of the assets they manage. Another difference is that robo-advisors provide automated and algorithm-based advice, while financial advisors provide personalized advice and guidance tailored to individual needs and goals.

Are robo-advisors good for retirees?

Robo-advisors can be a good option for some retirees because they can provide a low-cost, automated way to manage investments. However, if a retiree wants more personalized advice or help with tax and estate planning, there may be better options than a robo-advisor.


SoFi Invest®
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