It’s been nearly a decade and a half since the first robo-advisor, Betterment, emerged on the scene with its innovative automated portfolios of low-cost exchange-traded funds (ETFs), and the popularity of these robotized investment services only continues to grow. With their user-friendly designs, low minimums and competitive advisory fees, robo-advisors may be a suitable option for tech-savvy investors looking to outsource portfolio management. Recent estimates suggest the assets under management (AUM) across the entire robo-advisor market will reach $4.66 trillion in 2027, up from $190 billion in 2017.
Investing on your own takes work. Researching companies, following market news, monitoring your portfolio and making the necessary changes over time to ensure it stays aligned with your goals, all while trying to keep your emotions out of the picture — or at least in check.
If you’re intimidated by managing your own investments or simply don’t have the time or interest to learn how to invest, here are three ways robo-advisors beat investing on your own.
1. Robo-Advisors Can Save You Time And Energy
Stock picking requires you to spend time researching companies and staying on top of market news and trends. Even then, most people can’t consistently pick stocks that beat the market. This includes fund managers as well.
Actually, individual investors consistently underperform the market. From 1992 to 2021, the average retail investor returned 7.13%, while the S&P 500 returned 10.65%. Meanwhile, the S&P Indices versus Active (SPIVA) scorecard — a semiannual report published by S&P Dow Jones Indices that compares the performance of active fund managers against their benchmarks over time — shows that active fund managers tend to underperform as well.
Unlike self-directed investing, where you need to educate yourself on things like investment research and portfolio allocation, diversification and rebalancing, automating your investing is as simple as opening an account, answering a few questions and depositing money. With a few clicks, you can leverage automation to make investing less stressful.
Robo-advisors construct portfolios of diversified ETFs based on your responses about your investing goals, time horizon and risk tolerance. Robo-advisors use ETFs because they offer broad market exposure with low expenses, are simple and transparent and tend to be much cheaper than traditional fund management services.
Automated investing services also handle rebalancing to keep your portfolio aligned with your risk tolerance and goals, and many use tax-reduction strategies such as tax-loss harvesting to reduce your tax bill at the end of the year. Tax-loss harvesting is a strategy where stocks are sold at a loss to offset realized capital gains.
2. Most People Should Invest In Index Funds Anyway
That’s according to billionaire investor Warren Buffett, who’s a big proponent and has said on multiple occasions that low-cost index funds are the ideal investment for most people. “I don’t think most people are in a position to pick single stocks,” Buffett said during the 2020 Berkshire Hathaway annual shareholders meeting. “On balance, I think people are much better off buying a cross-section of America and just forgetting about it.”
Most robo-advisors employ passive indexing strategies. An index fund, which can be either a mutual fund or ETF, is designed to track an underlying index and gives you exposure to all the stocks in the fund through a single purchase, providing instant diversification.
The Vanguard Total Stock Market ETF (VTI) is an index fund that tracks the entire US stock market, while the SPDR S&P 500 ETF Trust (SPY) — which has a spot in Buffett’s portfolio — aims to track the price and yield performance of the S&P 500. Index funds that track a specific sector or industry are available if you want to take on more risk.
3. Advisory fees are low (or absent entirely)
A key feature for robo-advisors is that they’re often a fraction of the cost of traditional human advisors. Whereas the average annual advisory fee for a traditional advisor is around 1% of AUM, most robo-advisors charge in the area of 0.25% annually. Actively managed investments incur larger fees to pay for the research and analysis fund managers perform to beat index returns — which, as you may recall, they’re unlikely to do anyway. Of course, investment advisors provide more services than just managing your investments. A robo-advisor can’t consider your investment portfolio in the context of your other finances, which is where you’ll find much of the value in a human advisor.
Some, though, such as SoFi Automated Investing, M1 Finance and Titan Automated Investing, charge no advisory fees whatsoever. If you’re a cost-conscious investor with uncomplicated finances, this may be the way to go. SoFi also offers free, unlimited consultations with its certified financial planners, which means you can get many of the features of a traditional advisor — portfolio monitoring and rebalancing and planning services — at no cost.
Bottom Line
Not everyone will be comfortable putting their portfolio in the hands of an algorithm, but those looking to outsource their portfolio management should seriously consider the advantages of a robo-advisor. Numerous studies show that people, on average, underperform the market when they manage investments themselves, and the best robo-advisors, with their low-cost, diversified portfolios of ETFs, user-friendly platforms and competitive fees, may be a solution to this problem.
About the Author
Matt Miczulski is an investments editor at Finder. With over 270 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
