Are Robo Advisors Really Worth It?

It’s been nearly a decade since so-called robo-advisors first came on the scene offering digital advice to investors. During that time, stocks have gone nearly straight up. And during that time, most large investment firms have jumped on the band wagon offering automated investing tools. Firms like Wells Fargo, Fidelity and Vanguard now all offer a version of auto-bot investing services. The big attraction that brings investors to robo-advisors is their low fees, which range from .2% – .5% annually. But are robo-advisors really worth it?

There are a lot of things to consider when choosing an investment manager for your retirement savings. I agree that fees are important, but are investment management fees the most important thing to consider? Fortunately, there are independent firms out there who rank these advisors on a lot of different areas, including fees.

Barrons just recently came out with a report ranking these robo-adviors. The firms were ranked on many different factors including: access to advisors, features, size & tenure, financial planning, customer experience, costs, transparency & conflicts, account minimum, and performance.

SigFig had the highest ranking out of all of the firms with a score of 76 out of a possible 100. The number 10 ranked firm was SoFi with a score of 65. Even the best robo firm out there got a grade of a C, which is not too impressive. All but the top 4 firms got a failing grade!

Low fees are great, we all want to pay less in fees for everything in life. But when it comes to your money, the score card you use should not be the fees your paying. It should be the amount of money you end up with in your accounts at the end of the day. When you look deeper into these robo firms performance, I think you can see why their scores aren’t so great. During the first 6 months of this chaotic year, the S&P500 was down -4% and the average 60/40 model robo-advisor portfolio was down -2.9%, which isn’t that surprising. The top ranked firm for performance was Wealthsimple who posted a positive return of 0.4%, net of fees. They were in fact the only robo-advisor firm that posted a positive return YTD.

By contrast, my 60/40 model portfolio, which is the most popular model that my investor use, posted a positive return of +.72% YTD through 6/30/2020, net of ALL fees. Although you may be paying a robo-advisor a little less to manage your money, you would with a lot less money in your pockets at the end of the day. The difference between -2.9% and +.72% is +3.62%. If you had $500,000 invested, that’s $18,100 of extra money you could have in your account after just 6 months, even after you paid all the fees. If you had $1 million to start with, you’d end up with an extra $36,200 over a 6 month period! That’s money that has a real effect on your retirement success over time!

So what’s the point of all this? In my opinion, (and I realize that as an actual human financial advisor I am biased) I don’t think robo-advisors are worth it. I think it’s a case of penny smart and dollar dumb. You might save a little on your investment management fees, but at the end of the day, you’ll have a lot less money in your accounts. When you consider all aspects of retirement planning: access to an advisor and advice, financial planning, features and access to your money, customer experience, transparency and conflicts of interest, and performance, working with a Certified Financial Planner® professional is well worth it!

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Here’s a link to the Barron’s article that reviews robo-advisor firms.

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