What It Means
A robo-advisor is an automated, online investment advisory program. The SEC describes robo-advisers as registered investment advisers that use computer algorithms to give advice, often with little human contact. You answer an online questionnaire about your goals, time horizon, income, other assetsAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more and risk tolerance, and the program builds and manages a portfolio from those answers.
Try It: Compare a Monthly Fee With a Percentage Fee
Slide your balance. The $5 monthly fee comes from Investor.gov's examples; the 0.25% yearly fee is an example rate.
Balance:
At this balance the flat monthly fee costs more.
At this balance the flat monthly fee costs less.
At this balance the two fees cost the same.
How People Say It
- "I just answered some questions and it picked the funds."
- "The robo rebalances for me, so I don't touch it."
- "Five bucks a month is a lot on a two-thousand-dollar account."
The Breakdown
Formula
Subscription fee as a share of your balance = monthly fee × 12 ÷ balance × 100. A percentage fee in dollars = balance × yearly rate ÷ 100.
Worked example. Investor.gov's bulletin on subscription fees uses $3, $5 or $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more a month as examples of what an adviser might charge a smaller account. Take $5 a month on a $2,000 balance, and compare it with an example fee of 0.25% of assets a year.
| Balance | $5 a month, per year | Share of balance | 0.25% a year |
|---|---|---|---|
| $2,000 | $60 | 3.0% | $5 |
| $10,000 | $60 | 0.6% | $25 |
| $24,000 | $60 | 0.25% | $60 |
| $40,000 | $60 | 0.15% | $100 |
What the result means. A flat fee weighs most on a small account: $60 a year is 3% of $2,000, and the account has to earn that much before it's ahead. A percentage fee grows with the balance. In this example the two cross at $24,000. If the portfolio holds funds, each one also has its own expense ratioExpense ratioThe yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested. See more on top of the adviser's fee, so add those in when you compare.
Good to Know
Because robo-advisers are registered investment advisers, the SEC points you to Form ADV, the adviser's registration form and plain-language brochure, for how it charges, what it offers and any conflicts. Answer the questions carefully: the portfolio can only be as suitable as the information it's built on. Investments in a robo-advisor account can lose value.
FAQ
Are robo-advisors regulated?
Yes. The SEC describes robo-advisers as registered investment advisers, and their Form ADV brochure lays out fees, services and conflicts of interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more.
How much does a robo-advisor cost?
It depends on the firm. Some charge a percentage of your assets and some charge a flat subscription, with $3, $5 or $10 a month given as examples by Investor.gov. Any funds in the portfolio also charge their own expense ratios.
Is a robo-advisor better than a human financial advisor?
They suit different needs. The SEC notes robo-advisers often cost less and ask for lower minimums, while human contact is often limited, so decide how much personal advice you want.
Do It in Buhata
Accounts, Reminders
Add your robo-advisor account to Accounts in Buhata and set a yearly Reminder to recheck its fee against your balance.
Open BuhataRelated Terms and Categories
- Financial advisor
A general job title for someone who helps with money and investment decisions; the title alone says nothing about their license, training or duty to you.
- Fee-only advisor
An advisor paid only by the client, through hourly, flat, retainer or asset-based fees, who takes no commissions on the products they recommend.
- Expense ratio
The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.
- Micro-investing
Investing small amounts regularly, often a few dollars at a time through an app, usually by buying fractions of shares.
Sources
SEC Office of Investor Education and Advocacy, "Investor Bulletin: Robo-Advisers"; Investor.gov, "Robo-Adviser" (glossary); Investor.gov, "Subscription-based Advisory Fees: Investor Bulletin"
- www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-45
- www.sec.gov/resources-for-investors/investor-alerts-bulletins/ib_robo-advisers
- www.investor.gov/introduction-investing/investing-basics/glossary/robo-adviser
- www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/subscription-based-advisory-fees
Last updated .