The robo-advisor field has gotten incredibly crowded in recent years. Not only are there plenty of independent robos, but nearly every major brokerage firm as at least one of their own. With all the different features and fees, how can you know which robo-advisor is right for you?
Though we certainly don’t want to say that robo-advisor fees are the primary reason for selecting one over another, it is a major consideration. While that’s true at all portfolio sizes, it can be even more important for smaller accounts. Even small fees can make a big difference with modest account balance.
To help you choose the right robo-advisor for you we’ve prepared a detailed analysis of the annual fees you can expect to pay with 13 of the most popular robo-advisors.
But please don’t stop at the analysis! Low or even no-fees aren’t always what they seem. Be sure to read on and look at other factors that will affect the fees you’ll be paying with any particular robo-advisor, and when you might choose one advisor over another.
In most reviews, robo-advisor fees are presented as percentages. That’s convenient because it’s how robo-advisor publish their fees.
We decided to take a different approach. In the table below, we’re presenting the actual dollar cost of the fees you can expect to pay with each of 13 of the most popular robo-advisors.
As you’ll notice, some robo's have no annual advisory fee, some charge by percentage, and others by flat fee. We’ve presented all three types, which will give you a more accurate picture of the dollar cost of fees at each portfolio size level.
(1) Ellevest charges a flat fee of $1 per month ($12 per year) for a taxable account, $5 per month ($60 per year) for taxable and retirement accounts, and $9 per month ($108 per year) for multiple goal based-accounts, including retirement.
(2) Fidelity Go charges no fee on account balances under $10,000, $3 per month on balances between $10,000 and $49,999, then 0.35% per year on accounts of $50,000 and above.
(3) Schwab Intelligent Portfolios requires a minimum initial investment of $5,000.
(4) Vanguard Digital Advisor requires a minimum initial investment of $3,000.
(5) Acorns charges a flat monthly fee of $1 ($12 per year) for a taxable investment account, and $3 ($36 per year) for both a taxable account and an IRA.
(6) Blooom offers two plan levels, Essentials at $45 per year, and Standard at $120 per year, which allows you to place trades, receive withdrawal alerts, and have advisor access. Blooom is available for retirement accounts only.
(7) Stash offers its Beginner account for taxable investing at $1 per month ($12 per year), and $3 per month ($36 per year) for both a taxable account and an IRA.
As you can see from the robo-advisors listed in the table, most do charge a fee, whether it’s based on percentage for a flat rate. That’s why the actual annual dollar cost of the fees you’ll pay is more important than the published percentage rate.
Of the nine robos that do charge fees, five use a percentage of your account balance and four use a flat fee structure.
If we focus on those that charge a flat fee – Ellevest, Acorns, Blooom and Stash – it quickly becomes clear that the fee structure is high compared to percentage-based fees on lower account balances.
For example, Ellevest has a low-end flat fee of $12 per year. Compared to the cost of fees for Betterment and Wealthfront, the Ellevest flat fee structure doesn’t begin to become competitive until your portfolio reaches around $5,000.
But beyond that account balance, Ellevest’s flat fee structure becomes progressively lower. On an account of $250,000, even the high-end annual fee of $108 is just a small fraction of what you will pay in fees with Betterment and Wealthfront on the same portfolio size.
We can generally conclude that percentage fee structures will benefit those with smaller accounts. But as your account balance grows, the flat fee structure becomes more beneficial.
Special nod to Blooom: This robo-advisor has the highest flat fee structure of the four flat fee robos we’ve included on our analysis. But that doesn’t mean Blooom should be relegated to your last choice among flat fee robo-advisors.
That’s because Blooom is the only robo-advisor designed specifically to manage employer-sponsored retirement plans, like 401(k), 403(b), 457 and TSP plans. You may want to use this robo to manage your employer plan, despite the slightly higher fee structure.
Best of all, you don’t need your employer’s permission to engage the service. (Betterment does have a 401(k) management plan, but it’s only available if your employer chooses to use the service.)
It’s often helpful to be able to compare the fee being charged by a robo-advisor against an industry average. With that in mind, we’ve calculated the average annual cost of the nine robo-advisors that do charge advisory fees.
To make the comparison even easier, we’re presenting two separate averages for both those that use a percentage-based fee structure, and those that work with a flat fee. This will also help you to see how percentage-based these structures are lower on smaller account balances, while flat fee-based structures are lower – often much lower – on larger portfolios.
The portfolio size favoring flat fee based advisory fees begins at around $10,000, at least on the lower end of the flat fee scale.
But by $50,000, the advantage swings progressively in favor of flat fees over percentage-based fees. At $100,000 and $250,000, it isn’t even close.
But wait – there’s one more variable that may change your decision.
In looking at the first table above, you might be tempted to go with the robo-advisors that charge no advisory fee. After all, no advisory fee means higher net returns on your investments right?
But the reality isn’t as simple as that.
Of the 13 robo-advisors included, only Betterment and Wealthfront offer tax-loss harvesting across-the-board.
Schwab Intelligent Portfolios offers it for free on accounts over $50,000!
But both also have an annual advisory fee of 0.25% on most account balances. (Wealthsimple offers tax-loss harvesting on accounts greater than $100,000, and for that reason we’ll leave them out of this discussion.)
While you might expect that robo-advisors that have no advisory fee would be the natural choice, tax-loss harvesting can be a game changer. But that’s not always the case either.
Very briefly, tax-loss harvesting involves selling losing investments to generate losses that can reduce the gains on winning investments. You can even apply up to $3,000 of those losses against non-investment income, though that’s not typically the objective.
By reducing capital gains with deductible losses, you’ll minimize your capital gains tax liability, enabling you to retain more of your investments.
Let’s say you choose one of the robo's with no fee, like SoFi Automated Investing, Fidelity Go, Ally Invest Managed Portfolios or M1 Finance Expert Pies. On the surface, it appears you have an advantage on your investment returns of at least 0.25%, based on the absence of an advisory fee.
But here’s where tax loss-harvesting changes the outcome.
Betterment issued a tax-loss harvesting white paper concluding the strategy produces a net improvement in return on investment of 0.77% per year on average.
Now you may be thinking, “Of course Betterment produced a white paper on the benefits of tax-loss harvesting – it’s one of their product features."
But I can promise you the benefits of tax-loss harvesting are not unique to Betterment. I poured over several white papers on the topic, and though none reduced the strategy to a single average annual percentage benefit, all endorsed the strategy as beneficial.
You can do a search on “tax-loss harvesting white papers” and you’ll see what I mean. All have dense text and plenty of formulas, charts and graphs (if you like that kind of stuff) and all came to the same conclusion as Betterment, but without producing a single percentage benefit.
With tax-loss harvesting figured into the fee structure of both Betterment and Wealthfront, the investor is making a trade-off. She’s accepting a 0.25% annual advisory fee, in exchange for a 0.77% average annual tax-loss harvesting benefit.
When you subtract the annual advisory fee from the average annual tax-loss harvesting benefit, there’s a net advantage to you of 0.52% per year (0.77% - 0.25%).
Or, put another way, the average annual tax-loss harvesting benefit not only offsets the annual advisory fee, but it also adds 0.52% to your average annual net return on investment.
How will that advantage look like over, say, 30 years?
Let’s say the average annual return on a customized robo-advisor portfolio is 6%. Since that portfolio will be based on a combination of your investment goals, time horizon, and risk tolerance, it’s likely to be roughly the same no matter who the robo-advisor is.
With an initial investment of $10,000 invested at an average annual rate of return of 6% over 30 years, the portfolio will grow to $57,434.
But with the average annual net tax loss-harvesting return enhancement of 0.52% added to the average annual rate of return of 6%, the effective return increases to 6.52%.
With an initial investment of $10,000 invested at an average annual rate of return of 6.52% over 30 years, the portfolio will grow to $66,519.
A quick calculation shows using a robo-adivsor that offers tax-loss harvesting will increase your portfolio over 30 years by $9,085 ($66,519 - $57,434).
And that’s after deducting the annual advisory fee of 0.25% each year.
This is an important reason why the advisory fee charged by a robo-advisor should never be the sole determining factor in choosing which platform to invest with.
Before you get too excited about tax-loss harvesting, you should be aware that it can be a major benefit to some investors, but not to others.
Tax-loss harvesting applies only to taxable investment accounts. It doesn’t apply to IRAs and other retirement accounts, since they’re tax-deferred and won’t benefit from the strategy.
If you’re looking for a robo-advisor for a retirement account, the better choice is likely to be one that charges no advisory fee. The net result will be an increase in your average annual return on investment of 0.25%, due to the due to the non-existent fee.
The biggest benefit will go to investors who are in higher marginal tax brackets. Someone who has a combined federal and state marginal income tax rate of 30% will get a much bigger tax-loss harvesting benefit than someone who is at 15%, or perhaps 12% for the federal rate and lives in a state that has no income tax.
Account size matters. If you have $100 or $1,000 to invest, tax-loss harvesting won’t have a material effect on your return or your tax savings. Certainly, at $50,000, $100,000 or more, tax-loss harvesting is going to be more beneficial. If you have an account balance between $10,000 and $50,000, the benefit of tax-loss harvesting will largely depend on your income tax bracket.
It may be that when you first begin investing with a small portfolio tax-loss harvesting won’t be a factor. That being the case, you should favor robo-advisors with no advisory fee. But as your portfolio grows, certainly into the tens of thousands of dollars, you may need to consider switching to a robo-advisor that does offer tax-loss harvesting.
That is why it is important to continue reviewing what options are available every few years as your account grows.
Is your head spinning yet? Hopefully not, because there is one more key component you should be aware of. However, since it’s common to all robo-advisors, it’s not likely to be a deciding factor.
Robo-advisors commonly invest your portfolio in exchange traded funds (ETFs).
These are low-cost, index-based funds that track an underlying index, like the S&P 500. They’re designed to match the performance of the underlying market, which means they don’t either under-perform it, nor outperform it. That makes them lower risk than individual securities and actively managed funds.
But they’re also lower-cost. Unlike mutual funds, which often charge load fees, index-based ETFs have no transaction costs. And since they only trade securities within the fund when the composition of the underlying index changes, there’s very little trading activity. That translates into lower fees than will be the case with actively managed mutual funds.
But index-based ETFs do have fees, known as expense ratios. These are comprised of fund management fees, distribution fees and various other expenses. Since they’re deducted from the fund balance over the course of the year, they generally go unnoticed.
But expense ratios do exist, and they do reduce your investment returns – at least slightly.
Since each robo-advisor will use several ETFs in constructing your portfolio, and expense ratios will be different for each fund. The advisor will have a fee range, and the exact amount of expense ratio fees you’ll pay will depend on the funds included in your portfolio.
All robo-advisors use similar low-cost, index-based ETFs to maximize investment return. For this reason, there isn’t a significant difference in expense ratios from one robo-advisor to another.
As an example, the expense ratio fee range looks like this for the following robo-advisors:
If you really want to fine-tune the total fee costs of robo-advisors, you certainly can.
But as you can see from the numbers above, the difference from one robo-advisor to another is pretty small. And since your portfolio will be spread among several funds, it’ll be close to impossible to determine the exact expense ratios when doing a comparison from one advisor to another with any real precision.
The purpose of this guide/analysis is to help you determine the right robo-advisor for you, at least based on anticipated fees. But as you can see, there are plenty of variables – account size, account type (taxable or retirement), and your marginal tax bracket.
First, decide how much you have to invest, then analyze the features and investment options offered by each robo-advisor you’re considering. Only then should you take a look at the fee structure of each. And even though you may settle on one robo-advisor now, there’s an excellent chance you’ll be shopping for another as your portfolio size passes certain dollar thresholds.
We hope this guide will help you in making that decision, both now and when the time comes to make a change in robo-advisors.
