Robo advisors offer low-fee, no-bother investing backed up by serious expertise. But are they worth the cost?

Robo-advisors have been exploding in the past few years.

Investment services like these offer convenience and expertise for a fraction of the cost of a financial advisor.

While significantly cheaper than a flesh-and-blood financial advisor, robo-advisors aren’t free. However, they might just be worth it.

How to understand investment fees

When comparing the cost of a mutual fund or ETF, you need to look at the expense ratio. The expense ratio is the percentage fee the fund charges to pay for its management.

Actively managed funds (ones that have a person running it) are the most costly. Index funds are passively managed and cost much less.

Target-date funds

A type of index fund is a target-date fund, which aims for your planned date of retirement, shifting investments as you get older.

This would be a very simple way for you to “set it and forget it” when investing for retirement. Pick a date that you’ll expect to retire, and put all your money in that fund.

According to Morningstar, the average expense ratio of target date funds is around 0.78%. So for every $100,000 you have invested in the fund, you’ll pay $780 in fees.

But that’s the average target-date fund. A Vanguard target-date fund could cost as little as 0.14%. That’s like getting 82% off!


But what if you don’t want to use a target-date fund? What if you want a little more freedom and flexibility? At Vanguard, you can pick up well-diversified exchange-traded funds (like the Total Stock Market ETF) for as little as .05%.

ETFs are a newish innovation, and are similar to mutual funds, only they’re traded on the exchange (hence the name) like stocks. This makes them more versatile and liquid than a mutual fund.

That’s unquestionably cheap. But which ones do you want, and how much of your money should you put into each? That’s the going-it-alone dilemma.

How to calculate robo-advisor fees

First of all, when using a robo-advisor you’ll still have to pay the expense ratio of the funds you’re invested in. There’s no way around that.

On top of that, you’ll pay a fee to the robo-investor for doing the work for you. They’ll choose your funds and rebalance them as necessary.

Now let’s look at what this could actually cost you in the long run.

Are robo-advisors worth it?

To give you a sense of the way these different fees add up over the years, we ran a test. Here are our assumptions:

  • You’re saving $5,500 per year in an IRA (or about $458 per month).
  • You get an average annual return of 5%.
  • You’re 25 years old. This gives you about 40 years until retirement age.

With regard to fees, I’m going to use 0.25% as the fee for a robo-advisor, as that’s a fairly typical fee. For a full list of robo-advisors that we’ve reviewed, go here.

To estimate the cost of a financial advisor, I’ll use our estimate of 2% of total managed asset value.

Here are a few other notes and assumptions of the chart below:

  • The first column (Portfolio Value*) is the estimated value as if you paid no fees and got a 5% annual return
  • The rest of the columns are what that same portfolio would look like if you invested using an index fund, a target-date fund, a robo-advisor, or a financial advisor
  • The number in parentheses is the dollar amount you’d lose to fees (from the original no-fee portfolio) up to that point in time (so the portfolio value shown is the value after fees)
  • The estimated fees for the index fund and target-date fund portfolios were 0.05% and 0.14%, respectively, per the Vanguard estimates I noted above
  • These figures don’t account for inflation or any other external factors

Now that I’ve cleared up any questions you may have, here’s a look at an example cost comparison using those different investment methods:

YearsPortfolio Value*Index FundTarget Date FundRobo-advisorFinancial Advisor
5$31,185$31,146 (-$39)$31,076 (-$109)$30,989 (-$196)$29,651 (-$1,534)
10$70,986$70,803 (-$183)$70,473 (-$513)$70,072 (-$914)$64,025 (-$6,961)
20$186,615$185,584 (-$1,031)$183,744 (-$2,871)$181,524 (-$5,091)$150,068 (-$36,547)
30$374,964$371,663 (-$3,301)$365,806 (-$9,158)$358,790 (-$16,174)$265,704 (-$109,260)
40$681,763$673,326 (-$8,437)$658,436 (-$23,327)$640,737 (-$41,026)$421,109 (-$260,654)

So what do you notice?

The first thing your eyes probably go to is the amount you could pay in fees over the course of 40 years—over $260,000!

Since I’m sure you don’t want to lose out on that kind of money, take a look at the other three.

Obviously, if you assume the same return and the same contributions for each option, then the one that costs the least will also be the cheapest over the long term.

However, target-date funds, robo-advisors, and financial advisors all claim to offer consumers a better deal: higher returns, less hassle, or both.

Financial advisors, especially, claim that they can beat the market and get much higher returns. (90% of them miss their targets, however.)

Average annual returns over short periods of time can be misleading

One thing to keep in mind is that annual average return can vary drastically depending on your start date and end date.

The S&P 500, for instance, has an (inflation-adjusted) average annual return of 7% since its inception in 1928. But when an investor entered the market would seriously affect their returns.

Those who entered in the late 60s, for instance, wouldn’t have much of a return for years. One who put his money in in the 50s, however, would be doing great. Like so many things, timing is everything.

This holds true for more recent years, as well.

The later you came into the rally, the less it did for you. (This is why it’s so important not to panic sell after a market drop; you miss out on the inevitable rally.)

Robo-advisor Wealthfront is up front about the unpredictable nature of returns but still estimates an annual pre-tax return of between 4% and 6%.

Robo-advisors offer you convenience and peace of mind

Robo-advisors take the work and worry out of the three most important elements of retirement planning: regular contributions, low fees, and a diversified portfolio

Robo-advisors keep you diversified automatically

At Money Under 30, we talk a lot about the importance of asset allocation. You want to separate your investments, keeping a certain amount in stocks (and different kinds of stocks), a certain amount in bonds, and possibly some even in cash.

However, due to shifts in the market (i.e. stocks go up or down, or bonds go up or down), those amounts may get out of whack, and far away from where they should be to reduce risk. When that happens, you need to rebalance.

Robo-advisors’ algorithms automatically rebalance your portfolio based on a number of different factors, like your age and the amount of time you have until you need the money.

Robo-advisor websites make it easier to contribute to your account

It doesn’t matter what returns you get if you don’t regularly put money away. Regular contributions are key to retirement success. If a robo advisor can get you to put away more money than you would otherwise? Then it’s worth it.

Robo-advisors put your money in low-cost ETFs

Robo-advisors almost exclusively invest your money in exchange-traded funds, which tend to be very cheap, with expense-ratios often under .10%.


While it may seem like I’m pushing you toward trying a robo advisor, know that I’m completely neutral.

In fact, I invest the traditional way of choosing my own funds, but as I learn more about the benefits to robo-advising, and as I have less and less time, I am changing my opinion a bit.

Remember, I’m not a financial advisor. But my ask of you is to consider all types of costs when you are deciding how to invest—specifically the financial and time costs/savings of signing up with a robo advisor.

If you don’t know a thing about investing, and don’t have time to learn, I don’t suggest you try it on your own. Check out robo-advising.

But if you’re a savvy investor and have time to dedicate to in-depth research and frequent monitoring of your portfolio, a robo-advisor may not be for you.

Read more:

MoneyUnder30 receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. MoneyUnder30 is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

Recommended Investing Partners

  • Recommended M1 Finance gives you the benefits of a robo-advisor with the control of a traditional brokerage. M1 charges no commissions or management fees, and their minimum starting balance is just $100. Visit Site
  • $10 to get started Low fee robo-advisor, only $10 to get started. Offers multiple automated portfolio options Visit Site
  • $500 minimum Wealthfront requires a $500 minimum investment and charges a very competitive fee of 0.25% per year on portfolios over $10,000. Visit Site

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About the author

Chris Muller picture
Total Articles: 231
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.