The Pros & Cons of Robo-Advisors in Wealth Management (2024)

FAQs

What are the pros and cons of robo-advisors? ›

Tobo-advisors are low-cost, often have no minimum balance requirements, and tend to follow strategies suited for new and intermediate investors. They do not offer many options for flexible investing, and they reduce the human interactions that are sometimes critical when investment planning.

Robo Advisors are also infamous because they tend to follow indexed strategies which are best suited for some investors. The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.

In addition to creating an automated portfolio, robo-advisors can also offer their customers the following benefits: Lower fees compared with a traditional financial advisor. Lower capital required to start. The ability to avoid human error and bias.

The problem is that most robo-advisors do not offer comprehensive exposure to these assets. This means that investors must either open separate accounts elsewhere in order to gain exposure to these asset classes, or else capitulate to accepting a portfolio consisting only of stocks and bonds.

Do robo-advisors outperform the S&P 500? Robo-advisors can outperform the S&P 500 or they can underperform it. It depends on the timing and what they have you invested in. Many robo-advisors will put a percentage of your portfolio in an index fund or a variety of funds intended to track the S&P 500.

Robo-advisors, like human advisors, cannot guarantee profits or protect entirely against losses, especially during market downturns—even with well-diversified portfolios. Because most robo-advisors only take long positions, when those assets fall in value, so will the portfolio it has constructed.

Digital Advisor Use Dropped in 2022

High-net-worth investors exited robo-advisor arrangements at the highest rates. Here's how the data broke down along asset levels: $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.

Robo-advisor performance is one way to understand the value of digital advice. Learn how fees, enhanced features, and investment options can also be key considerations. Five-year returns from most robo-advisors range from 2%–5% per year.

A robo-advisor can help ease the burden of managing your portfolio as you transition to retirement—and help you figure out how to tap your assets in tax-smart ways.

Target Demographic

For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.

Are robo-advisor fees worth it? ›

Robo-advisors cost less than financial advisors. Robo-advisor annual fees average about 0.50% of assets under management, while human advisors often charge from 1% to 2%. In addition, robo-advisors generally let investors open accounts for much lower initial investment amounts than traditional advisors.

No, robo-advisors will not replace financial advisors.

Technology risks

For example, the inability of the robo-adviser to adapt to increasing business volumes or ineffective planning for added capacity may result in revenue and customer loss. If a firm plans to leverage a vendor robo-adviser, it's important to recognize and manage risks that can arise from the vendors.

Across all investors, robo-advising reduces idiosyncratic risk by lowering the holdings of individual stocks and active mutual funds and raising exposure to low-cost indexed mutual funds.

Surprisingly, our survey found that just 16% said they use these digital wealth management platforms to build wealth for retirement, and 9% of respondents said they'd use a robo-advisor to build long-term wealth.

A robo-advisor can be a good choice when you're starting out and just looking for a simple way to begin growing your wealth. However, as your net worth improves and your situation becomes more complex, you might need to consider turning to a human financial advisor to help you navigate your financial future.

Across all investors, robo-advising reduces idiosyncratic risk by lowering the holdings of individual stocks and active mutual funds and raising exposure to low-cost indexed mutual funds.