Robo Advisor Returns - What to Expect

Nov 06, 2022
4 People Read
Table of Contents
  1. Benefits of robo advisors
  2. Downsides of robo advisors
  3. Robo advisor fees
  4. Additional features of robo advisors
  5. Final thoughts

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Robo advisors are becoming more ubiquitous and it seems like new companies are constantly joining the robo-advising space to try and get a piece of it. This is causing stiff competition and may make consumers' heads spin when considering all the different options they have.


But did you know that robo advisor returns aren’t equal across the board? That’s right. Some robo advisors make more money for their clients while others don’t make anything and can even lose you money.


So how can you choose the best robo advisor for you? This article will explore some of the highest returning robo advisors, their pros and cons, and give you tips on how to go about choosing the best robo advisor for beginners.


Why use a robo advisor?


Robo advisors are becoming more popular due to their hands-off investing approach. Most robo advisors are just that–they act as robots that make automated investment decisions without having to approve trades, meet deadlines, and many other parts of the traditional investing process.


This means that robo advisors are meant for busy people that don’t have time to perform research on the stock market and make daily trades. It’s ideal for someone who wants to put a fixed amount of money each week or month into the stock market without having to lift a finger. 


Robo advisors also make investing accessible for more people through their services. Unlike some traditional investments, there typically isn’t a minimum required deposit or balance with robo advisors, and you can get started investing with as little as a few cents.


However, robo advisors may not offer the same type of returns as other investments. Robo advisors utilize the compound interest that your money receives to give you the potential for huge returns in about 30 to 40 years from now. Those looking to get a return on their money quickly should look elsewhere.

Benefits of robo advisors


  • Tax features. Tax-loss harvesting is the process of selling underperforming investments at a loss to take advantage of the tax incentives that minimize your taxable income. These tax-loss harvesting features are automatic and there isn’t anything needed from the customer to make this feature work.

  • Low management fees. Most robo advisors are reasonably priced and don’t take much away from beginner investors. Low management fees make it easy to stay with a single advisor for a long time.

  • Low account minimums. Most advisors don’t have a minimum limit to get started with. Those with $1 or $100,000 can use robo advisors and reap the rewards.

  • All-in-one solutions. Some robo advisors do more than just invest. You may be able to find a robo advisor that has other features like portfolio management, goal setting, net worth tracking, and many others. 


Downsides of robo advisors


  • Little advice from the robo advisor. Most robo advisors don’t offer much advising support for beginner investors who need more resources. You’ll want to work with a financial advisor who can provide advice to help you learn more about investing.

  • Often very little customer support. Most robo advisor companies don’t have great customer service options. That’s not to say that all robo advisors are bad, but we’ve seen reviews from many users claiming that some robo advisors have poor customer service.

  • Limited stock options. Robo advisors usually offer you a pool of stocks and other assets based on your risk tolerance and investment horizon. Those who want complete control over their investments will not be satisfied with robo advisors today.

  • Low returns. Robo advisors don’t tend to produce large returns for investors since they take a passive approach to investing. They typically don’t beat the market average by much and don’t offer major upside like other investments.


Robo advisor returns


Several studies show that robo advisors provide stable returns to their investors. The most recent Robo Report studied the performance of robo advisors and what factors led to the difference in returns. They analyzed the top 10 robo advisors on the market today that have been active for at least the past five years. 


Researchers found that the top 5 robo advisors provided an annual return of 13% while the bottom 5 returned investors with 11%. This is right on par with the average return of mutual funds which is around 14%, showing that robo advisors can be a great way to generate additional cash flow without having to be an active investor.


Robo advisor fees


Since robo advisors can offer such a great service to their customers, it makes sense that they need to get compensated for allowing users to benefit from their service. So this may make you wonder, how do robo advisors make money?


The fees charged by robo advisors are usually reasonable and cover things like security, maintenance, and general oversight, however each robo advisor has its own fee structure that you should take into account before investing with any of them.


Robo advisors can charge customers low fees to use their service since their computer algorithms do most of the work. This lack of human interaction translates into higher profit margins which the advisors can pass on to their customers.


Average management fees for robo advisors often hover around 0.25% of assets under management (AUM). This fee can vary based on the breadth of services the robo advisor offers, and some robo-advisors can offer their customers no management fee at all.


Additional features of robo advisors


As we alluded to previously, some robo advisors go above and beyond what you might think a traditional robo advisor does. Below are some of the most common additional features that robo advisors offer in an effort of standing out from the competition:


  1. Portfolio management

  2. Goal planning

  3. Tax-loss harvesting

  4. Advisory services


Final thoughts


Robo advisors can be a great way to participate in the stock market as a passive investor and let someone else do all the work for you. These tools aren’t meant for experienced investors who want hands-on investing–this is for busy professionals who want to automate their investments and achieve their financial goals on autopilot.

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Table of Contents
  1. Benefits of robo advisors
  2. Downsides of robo advisors
  3. Robo advisor fees
  4. Additional features of robo advisors
  5. Final thoughts