5 Ways Robo Advisors Reduce the Cost of Investing

Daniel Penzing
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Robo Advisors Have Low Overheads

To Save You Money When you first explore the idea of investing, it can seem like a scary and complicated process. You have to consider what you’re investing in and whether you’re saving enough to make it worthwhile. While you can do it all on your own, there are a growing number of financial experts encouraging people to take advantage of robo advisors and the low costs and effort they save. These experts point to the fact that the low costs and overhead required to run a robo advisor enables them to offer the same products as a personal advisor at a significantly lower cost. In fact, many people who use the services of robo advisors get better results than those who invest on their own.

Robo advisors are also free of the high fees and commissions that come with many investments, including mutual funds. The average mutual fund charges between 1% and 2.5% of assets under management per year, and broker commissions can be as high as 5% per trade. Lower investment costs through the use of robo advisors reduce the overall costs of investment, which in turn helps your investment results.

Another way that robo advisors help you cut costs is through the use of low-expense and low-fee funds. These funds are generally less than 1% per year in costs, and they can improve your after-inflation returns by as much as 50%.

Robo Advisors Have No Sneaky Sales Pitches

Many people who invest in mutual funds through a financial advisor or full-service broker are shocked to discover that they’re paying more in annual fees (as a percentage of assets) than they ever knew. It’s a common problem, and it’s due to several factors.

  1. You are being charged advisor fees (1% – 3%) in addition to the mutual fund expense ratios.
  2. You are being charged fees for each transaction entry, each year. Other brokerage fees can also apply, and these can be hidden.

Sneaky Sales Pitches

The situation is even worse for people who rely on financial advisors to make investment recommendations. In addition to fees listed above, advisors have another number to their advantage; 77% of American investors are unaware of how much they’re paying. So, in most cases, fees are not brought up until the investor meets with an advisor.

This may be the first time you’re considering financial help, so advisors know they can get away with the pitch that most of their competitors are using. If you’ve ever had a financial advisor give you the spiel about “trying before you buy,” you know what I’m talking about.

Robo Advisors Require Little to No Minimums

You may have heard about robo advisers but don’t think you can use one because of the minimums.

Yes, some robo advisers will have a minimum deposit before you can invest. But, they also work on a merit basis, so if you’re an educated investor, you could possibly request to skip the minimum.

In addition, some robo advisers will not work with taxable accounts.

Wealthfront does not have a minimum requirement, and also works with taxable accounts.

Robo Advisors Have Much Lower Fees

Actively managed mutual funds, which are almost always the default investment for most investment firms, charge investors for the privilege of owning their funds. The cost of a mutual fund can come in the form of an annual fee, known as an expense ratio, or as a percentage of the assets under management, or “AUM,” known as a load.

The average, passively managed index mutual fund charges an expense ratio of 0.61%, while the average actively managed mutual fund charges an expense ratio of 1.35%, according to ICI. Robo advisors charge much lower fees than the average mutual fund, with some charging only 25 basis points. This means that investors who choose a robo advisor typically save thousands of dollars in fees, every year.

Robo Advisors Let You Access the Experts for Less

So why exactly do robo advisors cost less than traditional financial advisors? It’s because robo advisors act as a middleman between you and the experts that really matter. And instead of charging you an hourly rate for their services, they charge you a percentage of your portfolio each year.

But there’s another key characteristic that really sets robo advisors apart from traditional advisors: they offer access to financial experts for less. Here’s how they do it:

Robo advisors help you invest for less by automatically investing your savings.

When your automatically invest your money, you give up the opportunity to choose when and even how to invest.

But as we discussed in best way to invest…automatically?, moving your money from savings to a company 401(k) is likely to give you better returns on your money than investing it in your own brokerage account. So why not let a robo advisor do it for you?

By automatically investing your savings, you don’t have to pay any advisory fees on the money you’re investing. Plus, since any money you save automatically is invested for you instead of by you, you don’t have to pay an hourly rate to money managers.

Robo Advisors Can Make Investing More Affordable

When investing for retirement, the last thing you want to have to worry about are the high expenses you’re paying for investment management. Let’s face it: paying high fees is one of the fastest ways to reduce your long-term investment returns. Those fees translate directly into lost returns, which are all the more painful in a retirement account because of their long time horizon.

Robo advisors are an alternative to traditional investment managers that not only costs less, they can also be much easier to use. Here are five ways that robo advisors can reduce the cost of investing for retirement.

What is a Robo Advisor?

Before diving into the five ways robo advisors can reduce the cost of investing for retirement, it’s a good idea to first understand what these automated advisors are all about.

A robo advisor is a type of online, automated, digital investment advisory service that’s available to the general public. These services are designed to invest your money into low-cost ETFs and automatically manage your account. They are an alternative to traditional human financial advisors, and their popularity has exploded in recent years.

Are Robo Advisors Always Cheaper?