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ROBO-ADVISORS: Should You Invest with Them?

M1 Finance, Acorns, Betterment, Personal Capital . . . you’ve probably heard most of these names before, but may not be totally familiar with what they are. Well, don’t worry, you’ve come to the right place! The above names all offer various forms of robo-advisor management!

Robo-advisors have been all the rage recently, with many claiming that they’re the way of the future! As robo-advisors are becoming more and more popular as a means of passive investing, we’re getting asked more and more whether or not rob-advisors actually are a good investment for achieving financial independence. Full disclosure: Amon and I have never used robo-advisors ourselves (except for as a robo-advisor research comparison!) as we prefer sticking to index funds. But, I still figured this would be a great topic to dive into with you guys! Keep reading to find out what robo-advisors are and whether or not they’re a good investment strategy for your FIRE journey.

What Are Robo-Advisors?

Robo-advisors are basically algorithm-based applications that give clients financial advice and provide investment management services with minimal human interaction. Robo-advisors use their digital platforms to offer a quick, easy and low-cost way to invest. They typically ask consumers to answer questions online about things like financial background, risk tolerance, length of investments, the amount of money available to invest, financial goals and values, etc. Based on these answers, robo-advisors use computer algorithms to determine the best investment portfolio for you and then continue to manage the portfolio, performing duties like asset management, dollar cost averaging, tax law harvesting and portfolio rebalancing - all at a fraction of the cost of traditional funds that are managed by a live person. Many of these applications also offer a hybrid approach to investing where you get the automated system, but can also access a human advisor when needed, for specific functions.


Considering robo-advisors are relatively new, it's understandable that some people think they are less legitimate than the other, longer standing brokerages like Charles Schwab, Fidelity or Vanguard. But this isn’t necessarily true. Robo-advisors are required to register with the US Securities and Exchange Commision, just like all the other brokerages, digital or not. This means that they have to adhere to the same laws and regulations, and are held to the same level of accountability as the more established brokerages.


Though the fees to invest with robo-advisors are typically much lower than actively managed accounts, coming in between 0.25% to 1% (sometimes higher), they are still much higher than you’d have to pay with index funds. This is one reason we personally love investing in low cost index funds. With index funds the fees are SO LOW, with many charging as little as 0.03%, or if your lucky (or invest with Fidelity!) 0%, to invest. That said, there are some robo-advisors, like M1 Finance for instance, that charge no fees at all, but this is generally an exception to the rule, not the norm.

For example, Acorns can charge anywhere from 2.5% to $1 a month in fees. Betterment can charge anywhere from 0.25% to 0.40% a year. Wealthfront can charge up to 0.25% a year, and Wealthsimple can charge up to 0.5% a year. Generally speaking though, these are very low fees, and they’re able to do this because they make their money in other ways, including referrals, ads/sponsors, selling other services, and even lending your money to other clients to invest.

What Do Robo-Advisors Invest Your Money In?

Robo-advisors invest in ETFs- generally all the same ETFs that we buy ourselves. Check out Betterment as an example. It allocates a percentage of stocks and bonds based on things like age, asset allocation desires, risk level and salary. Their stock ETFs contain every imaginable type of stock, from international corporations to smaller companies, and so do their bonds. So robo-advisors aren’t really doing anything different than what we would do.

How Do Robo-Advisors Perform?

Because these portfolios are so individualized, it’s difficult to compare how well a portfolio performs relative to the market. Despite doing a bunch of research, I was unable to find any real data out there that could speak to this. My solution: Create my own research! Here’s what I did with Amon: We created three different robo-advisor accounts - one with M1 Finance, one with Betterment, and the other with Acorns. We invested $1,000 into each account and then an additional $10 each week into each account over the course of six months. We then compared the performance of the three different portfolios and even compared them to Vanguard’s VOO, VTI, and VTSAX. Want to see the results? Check out the video here!

That said, regardless of the results, I think it’s always good to know what you’re getting into if you decide to invest with robo-advisors. Because of that, I’ve come up with a basic pros and cons list to help you decide whether robo-advisors are someth ing that you’d want to look into.

Pros of Robo-Advisors

  1. Robo-advisors make getting started in investing EASY. It is so easy for anyone to open up these apps and almost immediately start investing. In this way, it makes investing a lot more accessible to everyday people - even if you don’t have much experience.

  2. Robo-advisors are great for GOAL SETTING and TRACKING. Most have really useful tools to help along your financial journey and allow you to estimate how to get from one point in your investment to the next.

  3. Robo-advisors allow for INVESTMENT OPTIMIZATION. Because these brokerages are responsible for doing everything that you would otherwise have to do yourself, it’s likely that they’ve optimized the process so that it’s more efficient and effective than it would be with a human at the helm.

  4. Robo-Advisors strike a good BALANCE between dealing with human advisors and investing all on your own. This way you can kind of get the best of both worlds.

Cons of Robo-Advisors

  1. There are an OVERWHELMING AMOUNT of robo-advisors for prospective investors to choose from. In fact, from my research there are over 200! The problem with having this many options is that it becomes really hard to determine which of these is the best, which ones you should put your time and money into, and which ones you should avoid.

  2. Robo-advisors DON’T PUBLISH THEIR RETURNS so you don’t actually know for certain how successful these robo-advisors are.

  3. Using robo-advisors makes it less likely that you will be able to LEARN ABOUT INVESTING. Because it is so easy to use, often just requiring investors to fill out a questionnaire and transfer money to the account, you really don’t have the opportunity to learn much about the realities of investing. As a result, most people that use these apps end up robotically transferring money to the account without truly understanding what they are investing in or how their money is being managed.

  4. Robo-advisors are essentially “MIDDLEMEN” and are thus just another expense that you have to pay for. Robo-advisors buy their ETFs from established brokerage firms but add another fee on top of that for the service of purchasing those ETFs for you. So you’re basically just paying the robo-advisor to do the same thing that you could very well do yourself if you wanted to.

  5. Using robo-advisors doesn’t feel like “REAL” investing, especially given the EASE OF ACCESS to invested money. Because investors can so easily transfer their money between their investment accounts and their bank accounts, the average balance for many of these robo-advisor accounts is quite low. This leads me to believe that many investors end up using these robo-advisors more or less like savings accounts rather than as true, long-term investment accounts.

  6. You’re often encouraged to BUY WHAT YOU DON’T NEED. This can sometimes feel like a “bait-and-switch” where some robo-advisors will get their investors to invest with them at a lower fee but then start pushing additional services onto investors who subsequently end up spending more than they need to.

  7. The NUMBER of ETFs robo-advisors often include in their portfolios can be excessive. Honestly, you really don’t need all the ETFs that many of these robo-advisors pack into these individualized portfolios. In fact, in our experience you can achieve financial independence just by consistently investing in two or three well researched ETFs. You don’t need 30 of them!

So there you go - an introduction to robo-advisors and the pros and cons of using them. I’m not going to tell you that you should or should not use these platforms (especially since everyone is a unique investor and should take his/her unique situation into account when deciding on what to invest). But hopefully I’ve given you enough information for you to become familiar with the idea of robo-investing. Though we’re going to stick with the non-robo-advisor route, it's ultimately up to you whether or not you think using a robo-advisor would be a good investment strategy for your own FIRE journey. Good luck!

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Hello, We’re Amon & Christina

We’re former federal government employees that focused on saving, making, and investing money so that we could grow enough wealth in our investments to never have to work again.

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