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What Types Of Returns Can You Expect From A Robo Advisor?
Each robo advisor functions slightly differently, targeting different asset types, time horizons, and portfolio management strategies to cater to different investor needs.
As a result, your expected returns will vary with each robo advisor and your chosen investment strategy.
However, it’s possible to look at several prominent robo-advisors and compare their returns. Though, bear in mind that past performance is no guarantee of future results.
Here are the 3-year average annualized results from some top robo advisors.
Results are as of 31 December 2020:
- Acorns - 7.54%
- Betterment robo advisor - 7.22%
- Charles Schwab - 5.90%
- Fidelity Go - 7.24%
- SigFig - 9.12%
- SoFi - 8.81%
- TD Ameritrade - 8.68%
- Vanguard - 8.04%
- Wealthfront - 7.74%
- Wealthsimple - 6.86%
What Affects Robo Advisor Returns?
Many elements can affect your expected returns, many of which the robo advisor has no control over. Some of these factors include:
1. The assets invested in
The assets targeted by the robo adviser will have the greatest impact on your returns.
Many robo-advisors target mutual funds or an index fund like an exchange-traded fund (ETF), instead of individual stocks. This creates a more balanced portfolio that should provide steady, diversified returns.
With that being said, certain robo-advisors may focus specifically on a riskier asset class like emerging markets or alternative assets, which could provide higher returns.
2. The economic environment
Macroeconomic conditions can also have a significant impact on your expected returns.
During times of economic growth, the performance of investments like stocks, mutual funds, and ETFs will likely benefit from increased returns, and the inverse is true during times of economic downturn.
However, if your robo advisor allocates a specific portion of your portfolio towards uncorrelated assets, you’re in a better position to mitigate the adverse effects of these trends.
One of the key characteristics of robo-advisors is that it’s a largely automated investment process with little intervention from a human advisor. Without having to worry about paying a financial advisor, robo-advisors can often charge low fees since the processes are run by algorithms.
While this may not directly impact your returns, having to pay the high fees associated with a traditional advisor can take a chunk out of your returns.
4 Things To Consider When Looking At Robo-advisors
While your returns are no doubt a top priority, there are some other elements you should consider before picking a robo advisor:
1. Account minimums
While robo advisors generally cater to investors of all levels, some choose to focus on high-net-worth individuals and may have minimum account balances that exceed the amount you want to invest.
For example, Personal Capital has an account minimum of $100,000 while SoFi has a minimum of just $1.
2. Available investments
As an investor, you should always know where your money is being invested.
When signing up, many robo advisors will ask you to fill out a questionnaire to gain an idea of your financial goals, risk tolerance, time horizons, and more. They then use this data to recommend suitable equity allocation for you.
Make sure that the recommendations cater to your specific investment goal before opening an investment account.
For example, some robo investing platforms may focus primarily on ETFs. While these are suitable investments for many investors, some may be looking for assets that offer higher returns or greater diversification.
While many robo advisors benefit from charging minimal fees, it’s still important to be sure that you aren’t paying any extra or hidden fees.
Most platforms charge you an annual management fee that typically ranges between 0.25% and 0.50% of your portfolio value. There may also be investment fees. It’s important to be aware of the costs because they can take a chunk out of your potential returns if you’re not careful.
For example, Farther Finance charges just 0.8% on the total assets under management with no performance-based fees.
4. Portfolio rebalancing
One of the main advantages of speaking to a traditional human advisor or financial planner is the financial advice you get to consistently manage your investment portfolio and adapt to market trends.
Fortunately, several robo-advisors offer similar investment advisor services.
Portfolio rebalancing means buying or selling certain assets to maintain your desired level of asset allocation or risk, even in times of market volatility. The perk of automatic rebalancing is that you don’t need to figure out how to adjust your portfolio manually when the stock market fluctuates, keeping you on track to achieve your financial planning goals.
3 Excellent Robo Advisor Platforms To Consider Investing In
While there are plenty of robo advisors firms, here are three great choices for you:
Titan Invest is an investment app aiming to provide all investors with access to hedge fund like investments without the high minimums and excessive fees. Titan incorporates robo-advising and personalized investment advisory services into its three investment strategies:
- Titan Flagship. This is Titan’s large-cap growth strategy targeting 15-20 stocks for the long term. These are stocks in high-quality businesses vetted by Titan’s Portfolio Manager and Research team.
- Titan Opportunities. Titan targets small and mid-cap, US-based companies that Titan believes are well-positioned to experience solid growth.
- Titan Offshore. Offshore is Titan’s international growth strategy, targeting international businesses in emerging and developed markets.
The performance of the stocks Titan invests in determines the type of returns you receive. However, Titan outperformed over 60 competitors in Q2 2020 with an annualized equity return rate of 20.3% and an excess return rate of 18.1%.
For individual accounts, the minimum transfer amount is $100. To access the Opportunities and Offshore strategies, you need to have a net deposit amount of at least $10,000.
Note: If you’re investing with an automated deposit account or with a retirement account, minimums are $250 and $500, respectively.
Titan charges a 1% annual advisory fee if you deposit more than $10,000. For amounts less than $10,000, there’s a $5 monthly fee in place of the annual advisory fee.
There are no performance fees or trading fees, and all deposits and withdrawals are free.
Round is an actively managed investment platform that aims to outperform the market. Round is classified as a robo advisor platform but leverages expertise from leading Wall Street fund managers like Aberdeen, Brookfield, and Gabelli who regularly manage your portfolio.
Round targets a diverse range of assets like high-yield bonds, real estate, and alternative assets.
Since Round invests in a wide range of assets, your returns are dependent upon those assets. As such, there are no standard returns that investors can expect.
For example, if you invest in Aircraft ABS, your returns are dependent upon the lease paid by the company leasing the aircraft.
These returns will also vary depending on the aircraft. Smaller aircraft typically see an annual return of around 3-5% while larger aircraft investments see about 10-12%.
Round charges a 0.5% annual advisory fee.
However, if your investments generate no returns, Round will waive this fee for the month.
You’ll also need to front the investment management costs charged by the various investment managers when investing in the available funds.
3. Farther Finance
Farther Finance is a digital family office and wealth management platform providing personalized financial services and investment advice.
Farther invests your money across a range of diverse assets, including ETFs, mutual fund, and securities.
Since Farther primarily targets ETFs and stocks, the performance of those assets will determine your rate of return. With that being said, Farther targets annual returns ranging from 8-12%.
Returns are also affected by the type of account you have, your risk tolerance, and your time horizon.
There are no account minimums.
Farther Finance charges an annual 0.8% fee based on the total assets under management. There are no performance-based fees.
While it never hurts to speak to a registered investment advisor, utilizing robo-advisors is a fantastic alternative to invest your money.
With lower fees and solid returns, they’re a terrific alternative to a human financial advisor for newer investors who need financial planning help. They’re also excellent for investors who don’t have the time to analyze and pick out the best assets manually.
However, if you decide to invest with a robo advisor, don’t just focus on the potential returns. Ensure that you’re aware of the assets they invest in, the fees involved, and the investment minimums.
Answer a few short questions, and you’ll be presented with a list of recommended investment opportunities tailored to your unique preferences.