Robo Advisors Is It Good? Hidden Pros and Cons You Must Know

Technology advancement, AI and robotics allow us to automate almost anything.

It almost feels like robots will rule the world and make us humans redundant.

Even investing is not spared.

With the raise of robo-advisors, it is now challenging the traditional financial advisors who have been giving valuable financial advice to investors for decades.

Will robo-advisor change the financial industry forever?

What Is Robo Advisor?

Robo advisor is a digital advisory service for investing. Unlike conventional investment managers, robo-advisors generally have no direct human involvement in the advice given to the investors.

Today, robo-advisors come in many forms, but they all offer similar services where robo-advisors offer you investment advice generated according to complicated algorithms based on the company’s own knowledge of the current market.

Similar to an investment manager, a robo-advisor helps you to decide how to invest on the online platform according to the criteria and goals you have preset.

To do this, robo-advisor requires to collect information from their potential clients about their financial situation as well as their future goals. 

How To Invest In Robo-Advisor?

Each investment company providing Robo Advisory service has their unique ways of offering its investment service, but the general idea is the same.

Here Are The Steps To Invest In Robo Advisor

  1. Sign-up for the Robo Advisor website of your choice
  2. Complete a detailed questionnaire to determine your risk appetite and intended investment time horizon aka. ‘Goals‘.
  3. Fund your investment account
    • One lump sum funding option
    • Monthly automatic funding option
  4. Upon processing and approval of your funds, your Robo Advisor will purchase a mix of stocks options such as ETFs that will correspond to your profile and the current market conditions (This will varies from different Robo Advisor Companies)
  5. Your Robo Advisor will monitor the market 24/7 and perform periodic re-balancing of your portfolio

Robo Advisors typically invest in ETFs. Many robo-advisors investments will be invested with exposure to a variety of asset classes including equities, bonds, gold, and commodities.

ETFs that robo-advisors deal with are US or worldwide. Thus exposed to a vast variety of major markets such as the S&P 500, Dow Jones, Nikkei, FTSE 100, etc.

Up till now, everything about Robo Advisor sounds pretty decent. In fact, it sounds really good.

Will Robo Advisor Replace Financial Advisors?

As robo-advisor lacks the human element, which prevents them from providing the essential qualities and services characteristic of traditional financial advisors demanded by most individuals. Robo Advisor, will not be able to fully replace human financial advisors.

Robo advisor can help to automate part of the investing strategy for beginner investors who like a passive approach in managing their portfolio.

In the United States, renowned investment companies such as Betterment, Interactive Advisors, and Wealthfront have more than $10 billion in assets under management. And robo-advisors are used to help manage some of the assets.

These robo-advisors are software that uses sophisticated algorithms to invest your money for you without you even touching it.

It sounds pretty amazing.

But, will robo-advisor really have the ability to 100% automate our investment effectively?

I suddenly remember something said by my mentor,

“When things sounds too good to be true, beware.”

So is there a catch?


“Is Robo Advisor a revolutionary system that help you make money, or just a scam?”

Let’s Find Out!

What Are The Pros Of Investing Using Robo-Advisor

Robo-advisor has many benefits which include: lower fees, tax-loss harvesting, and automatic rebalancing, but these benefits actually helps you in reaching your investing goals? Let’s explore these benefits in more detail.

1. High-Diversity, Low-Fees Portfolios

Robo Advisor generally invested in a portfolio of low-cost index funds such as ETFs balanced with a certain percentile of Bonds and commodities such as Gold.

This created a highly diverse portfolio which will be very time consuming and expensive if an investor tried to replicate its actions.

A Robo Advisor allows performing such feat at low-cost fees which gives you an 80% to 90% chance of outperforming most mutual funds with high fees.

Robo Advisor is designed to allow you to get an investment portfolio that adheres to the best market research provided by the platform. Your portfolio will vary between each individual and are invested in a way best to reach your set goal.

The ability to reach your goals and the efficiency of Robo Advisor will highly depend on the complicated algorithm set by the Robo Advisor provider. There is no guarantee of the results, but it is a good way to start investing.

2. Passive Way Of Investing, Ease of Use

Who likes things that are easy to use? Me! I think most people are too!

The next best benefit of Robo Advisor is that it is really simple to use. With a few clicks of the mouse in the comfort of your home and answer a few simple questions, you are all set up and good to go.

The questions will determine your risk tolerance level and your investment time frame which will eventually lead to your final goal for investing.

The algorithm of the Robo Advisor will make a series of complicated calculations and matches your personal investment profile to an investment portfolio that is personalized for you.

Once set up and chosen your funding methods, your investment will basically be a semi-passive approach thus allowing you to focus on other things in life.

3. Low Minimum Balances

Having a dedicated financial advisor to serve you is not possible if an investor is having a small net worth, the fees alone might take a huge chunk off your profits.

On the other hand, Robo Advisor generally has a low or even no minimum balance in your account to get you qualified to invest with a Robo Advisor. You can decide on your own how much you want to invest and how frequently you want to invest.

Many platforms will recommend using the automatic monthly funding method because it provides the following benefits:

  • Passive
  • Dollar Cost Averaging
  • Take emotions out of investing
  • Don’t require timing of the market

Alternatively, you can learn how to invest like the pros such as Warren Buffett by reading some of the Best Investing Books which I have compiled in my previous Article.

Read Also: Best Investing Books Reviews

What Are The Cons Of Investing Using Robo-Advisor

There are a number of potential drawbacks to using a robo-advisor to invest your money, which potential investors should be aware of before deciding whether or not to use one.

1. Robo-Advisors Are Not Financial Planners

Robo Advisor is marketed to play the role of a replacement for a professional financial advisor, but they are not financial advisors.

A Robo Advisor can do tons of complicated calculations to achieve an optimal portfolio re-balancing on a periodic basis in accordance with your set goal. In addition, it comes at a much lower cost than a professional financial advisor.

But a good professional advisor does much more than re-balancing your portfolio, or help you set your goals.

A good financial planner understands your situation and gets to know you personally. Guide you through your financial journey while helping you to optimize and implement a personalized plan, which uses not just the tools found in Robo Advisor, but all of the financial tools and opportunities available to you to reach your specific personal goals faster.

Conclusion: Robo-advisors are not financial planners or financial advisors. But a tool that helps you implement and manage your investment portfolio.

2. Low Fees But Not The Lowest-Fees Compared To Other All-In-One Funds

Fees, fees, fees! The scary 4 letter words that eat investment returns from your pockets.

To be fair, Robo-advisors are typically cheap, and their fees generally cost 0.35% to 1%. Comparably this is much cheaper than many conventional mutual funds that have fees as high as 3% to 6%.

But the fees of Robo Advisor still cost more than some of the most popular lowest cost, highly diversified all-in-one funds available in the market.

In the United States, a great example will be funded by Vanguard. Typically Vanguard has a whole list of ‘all-in-one funds’ ETFs with extremely low fees. The fees typically cost around 0.04% and 0.12% per year.

That is almost 10 times cheaper than the cheapest Robo Advisor found currently in the market!

Betterment charges a baseline of around 0.25% for its management fee, plus the cost of any underlying investments typically adds up to a total cost of around 0.35% in fees per year. (General mutual funds have fees up to 3% to 6% so Robo Advisor such as Betterment is still about 10 times cheaper than many mutual funds.)

In percentage-wise there is not a huge difference between the two (less than 1%), and even with the management fee Betterment is still much less expensive than most other options.

Nonetheless, fees are still fees, they eat into your potential return.

I believe it is still good to know that there are other cheaper ways to invest that give a similarly diversified all-in-one portfolio.

Conclusion: Fees are considered low, but not the lowest. There are better opportunities out there.

3. Don’t Guarantee Returns

To be fair, all investment doesn’t guarantee returns, so it is not specifically applied to Robo Advisor.

Some marketers market Robo Advisor as a form of saving and makes it feels like investing in Robo Advisor will guarantee your return, but Robo Advisor is not a saving plan and it does not guarantee the return on your investment.

Like any stock or any other investment such as gold, it fluctuates and is usually determined by the general market condition and timing horizon of your investment.

Investing in Robo Advisor will have a certain level of risk, this is the same for any other investment. Sometimes you will have great returns, and sometimes you lose but generally over the long run (more than 10 years) if you invested correctly, you will have some returns.

If you are looking for high returns like an investing legend such as Warren Buffett, you will have to invest like him. Warren is a value investor who has over 28% annual returns over his decades of investing career making him the 3rd richest person in the world according to Forbes.

We have an article that may help you learn which type of Value investor you may want to be.

Is Robo-Advisor For You?

After learning about some Basics of Robo Advisor and reviewing so many of the Pros and Cons, I asked myself the final question.

Is Robo-Advisor for me?

Overall, robo-advisor is great in many ways such as; highly diversify portfolio, low-fees, passive way to invest, easy to use, automated rebalancing and low minimal balance required.

If you are a investor who prefer a more hands-off approach I think that Robo Advisors is a great option. They offer high-quality, personalized research-based investment portfolios at a very low cost, making it easy for people like us to invest. It doesn’t require us to spend time learning the required knowledge in order to invest while driving us closer to our set goal.

If you are looking for the best robo-advisor, we’ve compared some of the best robo-advisor you can find in the current market. Check out our list, and used the guide in the list to find a robo-advisor that will suit you on the long-term.

Going back to the question on whether if I will use a robo-advisor.

Unlike most passive investors, personally, I love investing and find researching stocks and equity fun and enjoyable. To me, investing is my hobby and my passion, thus I will rather decide how I should invest on my own using a DIY approach than by a professional fund manager or robo-advisors.

So unless you are like me who loves to do financial analysis and DIY my portfolio, robo-advisor is a great way to to invest passively.

What guides me in my investing journey are some of the many books I read over the past years.

Here I have selected the best of the hundreds of books that I have read and made a simple review of each book. These books have helped me and I believe will greatly benefit you as well.

Read Also: Books Reviews – Books That Will Change Your Life

Taking your first step is always hardest, but it is the most important step to greatness.

Kopi Buddy

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