It’s happened to most of us. Your neighbour or coworker just told you about an app that helps you generate passive income. All you have to do is invest, and slowly you will watch your savings grow without doing anything or speaking with anyone. Tempting, right?
Of course, with a healthy bit of scepticism, many of us wonder, “Well, what’s in it for them?”, or “How do robo advisers make money?”
In this article, we hope to bring a greater understanding to robo advisers, showcasing how they make money and helping you decide whether or not to use one.
Be sure to also check out our essential guide to Robo Investing!
What is a Robo Adviser?
For starters, let’s define what a “robo adviser” even is. A robo adviser is any digital investment platform that uses mathematical rules and algorithms to provide ongoing financial advice. The earliest established robo advisers were born out of the 2008 financial crisis. They are primarily controlled online and through smartphone applications, making it possible to invest money with limited or no human interaction.
How Do Robo Advisers Make Money?
So clearly, robo advisers are designed to properly manage and increase any investor’s wealth. It shouldn’t come to use as a surprise then that robo advisers are able to make money for themselves.
Although it varies between platforms, robo advisers typically make money on fees charged to their users. Of course, without having to pay account brokers, robo advisers may have fees that are lower than investing with a traditional financial adviser.
Here are the most common fees robo advisers charge for their services:
- Basic Account Fees (fixed percentage)
- Trade Fees
- Fees for Add-on Services
- Account Opening or Closing Fees
For most robo advisers, there is a standard account fee that is taken as a fixed percentage of your account balance. This percentage varies depending on the platform you choose, the method of investing, as well as amount of money in your account. Basic account fees typically never exceed 1%, with most robo advisers taking an advising fee between 0.25% and 0.75%.
Who Uses Robo Advisers?
Robo advisers are becoming more and more adopted, as studies have shown that their use is slowly increasing with newer generations. Robo advisers are great for working professionals who are too busy (or don’t want) to meet with an in-person financial adviser. They are also incredibly accessible to younger generations and first-time investors who can start a low-balance savings account at the click of a few buttons.
Should You Use a Robo Adviser?
With fees adding up while an algorithm controls your portfolio, robo advisers may not seem like the best idea for some people. On the other hand, passive money management is exactly what some investors are looking for. To help you decide whether or not to use a robo adviser, here are the main pros and cons people have been experiencing for the past decade.
Pros of Using a Robo Adviser
Hands down, the number one reason people choose to invest with robo advisers is convenience. Here are the advantages most investors utilise with a robo adviser:
- Extremely Easy to Set Up
- Limited Ongoing Maintenance
- Generally Low Fees
- Different Services and Engagement Levels
- Accounts Can Begin At Low Investment Levels
More than anything, robo advisers are great for people who just want to “set it and forget”. As they are extremely easy to start and manage, investment accounts with robo advisers are great for first time or busy investors.
Cons of Using a Robo Adviser
Of course, there are downsides to letting an algorithm determine the fate of your estate. Especially in comparison to traditional financial advisers, here are some of the reasons people are staying away from robo advisers:
- Lack of Individual Attention
- Performances are Not Guaranteed
- Occasional High Costs
- Inability to Diversify
For heavily involved and highly specific portfolios, robo advisers are generally not the route to take. Additionally, if you are keen to the personal touch of a specific financial adviser that understands your goals, robo advisers may not deliver the amount of customer service you are accustomed to.
How Much Money Can You Make with Robo Advisers?
For most people, whether or not to use a robo adviser comes down to one simple question: how much money can you make?
Perhaps you are saving for retirement or else just looking to acquire more wealth for your next big purchase. Either way, investing really is all about your ROI.
Unfortunately, this question is not easy to answer. The performance of any Robo adviser account will vary highly based on the amount of money invested and structural preferences of the portfolio. With that said, robo advisers are steadily gaining popularity as a safe way to build wealth. While taking a cut for themselves, robo advisers have the ability to make you any realistic amount of money that is based on your investment and financial goals.
To sum things up, robo advisers are a new, but easy and reliable way to invest with limited human interaction. Robo advisers invest your money using mathematical equations and algorithms designed to acquire wealth at a predesigned rate and risk. In doing so, they are able to make you money. In return for their services, most robo advisers charge a set of fees so that they can continue to stay in business, and help more investors manage their wealth.