Should I use Robo advisors?

I have been using Robo advisors for two years now. In this post, I will talk about what they are, how they work, cost, asset allocation, pros/cons, and my thoughts about them.

What are Robo advisors?

Robo advisors is a type of financial service that invests your money with algorithms automatically. It has minimal human intervention. The specific Robo advisor I use is called “Fidelity Go”.

How do Robo advisors work?

When you sign up for a Robo advisor, they will gather information about your financial situation, your investment goals and your risk tolerance. Based on the info, they will decide how your asset allocation is going to be like.

Cost

Fidelity Go offers a tiered pricing:

• For accounts with a balance < $10,000, it is free.

• For accounts with a balance between $10,000 and $49,999, it is $3/mo.

• For accounts with a balance over $50,000, it is 0.35%/yr.

Asset allocation

I chose an “aggressive growth (85% stock)” strategy. With this strategy, the asset allocation is as follows:

• Domestic stock 60%

• Foreign stock 25%

• Bonds 14%

• Short-term 1%

Based on the info you provided, the asset allocation might be different. In general, the more risk tolerant you have, the higher the stock percentage will be.

Performance

I did a few lump sum investments into Fidelity Go when I was using it for the first year. In the second year, I made no contribution to it at all. After two years, my investment in Fidelity Go is up 23%. 

For your comparison: 

In the same time period, S&P 500 went up by 44%.  

Keep in mind that any diversified asset allocation, particularly with bonds mixed in, will have less variance or risk than a pure S&P 500 investment, so these results are not directly comparable, but it does show that for an investor who is completely unconcerned with risk or potential financial loss, investing 100% into an S&P 500 index fund may give better performance.

Pros and Cons

Pros

1. No human error

Since Robo-advisors execute orders through algorithms, it avoids human errors.

2. Relatively low fee

Compared to other managed accounts, Robo-advisers charge a relatively low fee. 

3. No minimum balance

Some managed accounts require a very high minimum investment. However, with some robo advisors, you can invest with no minimum balance requirement.

4. Easy to use
   With a Robo advisor, all you need to do is to add money to your account. You don’t personally need to handle things like placing orders, rebalancing your account, etc.

5. Automatic rebalancing
   This is a frequently overlooked principle of investing.  Because different assets change in value over time, your portfolio can drift out of your intended allocation.  By rebalancing assets, you are trading value out of strong-performing assets into weaker assets, which is a form of “buy low, sell high” that boosts long-term results.

Cons

1. Limited asset class choices

With Fidelity Go, you can’t invest in commodities or real estate.

2. No granular customization for asset allocation

You can’t control the exact asset allocation. They will just assign it to you based on your answers to their questionnaire.

My final thoughts

Should you use Robo-advisors? It depends.

If you are new to investment and don’t know how to invest on your own, then robo advisor is a great place to start your investment journey. Especially if your balance is less than $10,000, there is no fee at all (with Fidelity Go).

However, once you have learned some basics about how to invest on your own, or if you have a larger amount of money to invest in, I think investing in low cost index funds is a better choice.

Disclaimer: I am not a financial advisor. Investing is risky and you could lose your money. Please use your own judgment and talk to your financial advisor before making any decisions. 

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