Understanding robo-advisor performance | Vanguard (2024)

FAQs

How well do robo-advisors perform? ›

Robo-advisor performance is one way to understand the value of digital advice. Learn how fees, enhanced features, and investment options can also be key considerations. Five-year returns from most robo-advisors range from 2%–5% per year.

Do robo-advisors outperform the S&P 500? Robo-advisors can outperform the S&P 500 or they can underperform it. It depends on the timing and what they have you invested in. Many robo-advisors will put a percentage of your portfolio in an index fund or a variety of funds intended to track the S&P 500.

Wealthfront carries the same safety protocols that you'll find in most major financial institutions. Your cash is insured by the FDIC, while investments are insured by the SIPC.

Regarding the population of robo-advisor users, Woodyard and Grable (2018) found that users of robo-advisors tend to be younger, confident in their financial ability, and distrustful of traditional financial channels. The market for robo-advising has experienced rapid expansion over the past five years.

But according to the Robo Report, the five-year returns (2017 to 2022) from most robo-advisors range from 2% to 5% per year. And Wealthfront, one of the best robo-advisors available, also states that customers can expect about a 4% to 6% return per year, depending on their risk tolerance.

The problem is that most robo-advisors do not offer comprehensive exposure to these assets. This means that investors must either open separate accounts elsewhere in order to gain exposure to these asset classes, or else capitulate to accepting a portfolio consisting only of stocks and bonds.

Digital Advisor Use Dropped in 2022

High-net-worth investors exited robo-advisor arrangements at the highest rates. Here's how the data broke down along asset levels: $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.

Nearly 7 in 10 Millennial millionaires have some money in robos or automated portfolios. Moreover, nearly 20% of Millennial and Gen Z households who know the investment products they own have some money in robos versus only 13% of Gen X and only 2% of Boomer+ households (Boomers and older).

The SEC's order also found that Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

The main con of Wealthfront is that its required $500 minimum deposit is higher than other free robo-advisors like SoFi Invest and Betterment Investing.

What if Wealthfront goes out of business? ›

Your cash is insured by the Federal Deposit Insurance Corporation (FDIC). This coverage protects your cash in the event that a bank goes out of business. Wealthfront uses multiple partner banks to ensure FDIC coverage of up to $8 million for your cash deposits.

This will vary significantly depending on the risk profile of the portfolio, broader market conditions, and the specific robo-advisor used. Some robo-advisor portfolios may outperform the S&P 500 in certain years or under specific conditions, while in others, they underperform.

The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.

Target Demographic

For robo-advisors, these include Millennial and Generation Z investors who are technology-savvy and still accumulating their investable assets.

This will vary significantly depending on the risk profile of the portfolio, broader market conditions, and the specific robo-advisor used. Some robo-advisor portfolios may outperform the S&P 500 in certain years or under specific conditions, while in others, they underperform.

Limited human interaction: Robo-advisors do not offer the same level of human interaction as traditional financial advisors. This can be a disadvantage for investors with more complex financial needs or investment goals.