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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.