Study: Which Robo Advisors Have the Most Investor-Friendly Fees?

Robo advisors brought investing to the masses, making it easy for anyone to invest in a portfolio of diversified assets geared toward their individual investment goals with just the click of a few buttons. However, this added convenience and accessibility comes with a literal cost: robo advisor fees.

Fees can eat up a significant amount of your investment returns over the years—we're talking hundreds, or even thousands of dollars, depending on your portfolio size and the robo advisor you use. While investment returns compound over time, investment fees also compound over time, as every dollar spent on robo-advisors' fee is one less dollar that’s capable of earning compound returns for your portfolio. 

That's why we decided to rank some of the most popular robo advisors by order of how much their management fees impact your earnings over time. We've compiled fee information across all major robo advisors and developed a model for calculating the short and long-term costs of investing with each platform. In this study, you'll find out exactly which platforms will take the biggest and smallest cut in fees according to your portfolio size.

• Our analysis showed that across most portfolios Fidelity Go and Vanguard Digital Advisor had the lowest fees, while Blooom and iFlip had the highest fees.
• Robo advisor fees typically range from 0.20% to 1%, with the average robo advisor fee hovering around 0.73%.
• Fixed monthly fees scale better with larger portfolios, assuming they do not ratchet up in size.
• Expense ratios scale directly with the size of your portfolio, so they're more advantageous for smaller portfolios.
• The average 1-year expense ratio was 0.67% for a $5,000 sample portfolio; 0.52% for a $10,000 sample portfolio; and 1.01% for a $50,000 sample portfolio.
• The average 5-year total cost came out to $322.52, $520.06, and $2,216.98, respectively for the $5,000, $10,000, and $50,000 sample portfolios.

Robo advisors are automated investing platforms that handle investment selection and allocation on your behalf. Similar to many investment advisers, these platforms make their money by charging a fixed expense ratio that can take one of two forms:

• A fixed monthly fee
• A fees charged as a percentage of assets under management

Depending on the platform, some robo advisors tier their pricing based on the size of your portfolio and complexity of services provided. In addition to their algorithmic investing capabilities, robo advisors offer benefits beyond what you can obtain through a typical brokerage account, including automatic portfolio rebalancing, allocation optimization based on your financial profile, and in some cases, tax optimization and tax loss-harvesting capabilities. 

We accounted for differences in tiered pricing by applying fee estimates to three different portfolio sizes that were common among younger investors ($5,000, $10,000 and $50,000). The sample of robo advisor pricing structures that we collected was most frequently segmented along these lines.

All portfolios were assumed to earn the same annual rate of return of 10%. We note that our analysis only observes fees and opportunity costs of lost investment returns related to those fees. We do not factor in any marginal advantages or disadvantages that might be gained through any individual robo advisor’s proprietary algorithms due to both 1) the lack of public data on historical performance and 2) variety of custom portfolios which make fair comparisons difficult. 

Some of the robo advisors featured in our study sample used fixed monthly fee structures rather than charging a percentage of assets under management. To ensure that we could fairly compare robo advisors who used expense ratios with those who used fixed fee structures, we converted each fixed fee structure into an expense ratio based on our investment calculations using $5,000, $10,000, and $50,000 portfolios.

It's important to consider portfolio size when analyzing robo advisor fees, as some fee structures are more advantageous for smaller portfolios while others are better for larger portfolios.

The robo advisors that performed well in our rankings by portfolio size are as follows:

* M1 Finance and Fidelity Go both charge fixed fee structures for these portfolio sizes. We converted these annual fees into 1-yr expense ratios for comparison purposes.

Vanguard did consistently well when it came to the $10,000 and $50,000 portfolios due to their low overall expense ratio, while still remaining relatively competitive for $5,000 portfolios. Their fixed expense ratio made for a consistent cost structure regardless of how large the portfolio grew.

Generally speaking, robo advisors that charged expense ratios rather than fixed fees seemed to be more cost-effective for smaller portfolios due to their ability to scale with the size of assets under management.

The smaller $5,000 portfolio category was the only section where Vanguard was bested. Fidelity Go and iFlip ended up being the cheapest robo advisors for the small portfolio category due to their robo advisor services being offered at no cost for portfolios under $10,000 and $6,000 in size, respectively.

Netting out Fidelity and iFlip which dropped their fees at the $5,000 level, Vanguard, Betterment and Wealthfront offered the most competitive fees in this category, ranging from 0.20% to 0.25%.

By contrast, robo advisors with fixed fee structures tend to eat up a larger portion of assets for smaller portfolios but these fixed costs are less impactful as the size of the portfolio grew.

M1 Finance, which charged a fixed annual fee of $125 per year, regardless of portfolio size, jumped the rankings in our $50,000 sample group. Its fixed fee structure became substantially more competitive as the size of the portfolio grew; M1’s $125 annual fee converted into an approximate 0.23% expense ratio based on our calculations, making it the second most competitive roboadvisor in the $50,000 portfolio category.

To shed more light on the impact of robo advisor fees over time, we calculated how much these fees would add up to over the course of five years. This five-year total cost can provide long-term investors with the best picture of how fees will impact their earnings.

For the purposes of this analysis, we factored in both the total dollar amount paid to the robo advisor annually as well as the lost opportunity cost of those fees had they been invested at the same assumed rate of return as the rest of the portfolio for the five year duration.

The long-term cost rankings were largely consistent with the fee comparison rankings outlined in the earlier section. This isn’t surprising as the expense ratios charged for the majority of robo advisors scaled both the fees paid and opportunity costs for each scenario.

The most notable difference was in the $50,000 portfolio, where M1 Finance managed to beat Vanguard when it came to the total cost over 5-years. This result might seem counterintuitive. After all, the one-year expense ratio calculated in the previous segment did imply that Vanguard—with a lower overall annual expense ratio of 0.20% versus the M1 converted ratio of 0.23%—is cheaper. However, the introduction of a 5-year time frame for this analysis meant that M1’s annual fee of $125 became a progressively smaller proportion of the total portfolio as it grew over time.

By comparison, Vanguard’s expense ratio scaled up costs as the portfolio grew over time, which scaled up the fees charged as returns increased. This scaling impact was what ultimately made M1 Finance the most attractive portfolio over the long run, as M1’s fees did not scale up but instead remained fixed over time.

Our analysis takes into account both the dollar value of investment fees paid annually to robo advisors and the lost opportunity costs of those fees over time.

We collected a sample of fee quotes from over a dozen established robo advisor services. From this sample, we distilled a selection of “traditional” robo advisor services by eliminating any robo advisors that specialize in crypto-trading, leveraged trading, and Islamic finance, among other investment strategies that might differ from the traditional norm of long-only equity and fixed income strategies.

From this sample size, we recorded the fee structures for each robo advisor and noted any cutoffs in pricing based on portfolio sizing. While there was no hard rule for pricing cutoffs when it came to portfolio size, our sample showed commonalities in pricing cutoffs at the $5,000, $10,000, and $50,000 portfolios. These portfolio sizes were therefore chosen as the trial portfolios for our analysis.

We then assigned the fixed dollar cost and annual expense ratios for each robo advisor to their respective portfolio scenario. We ran scenario analyses for all ten robo advisors for each of the $5,000, $10,000 and $50,000 trial portfolios in both one-year and five-year cost scenarios.

After calculating the portfolio returns, fees paid, and opportunity costs for each robo advisor in each scenario, we recorded the data and ranked the results.

We note that each robo advisor uses its own proprietary algorithm which may or may not be able to outperform market returns over time. Due to both the variety of portfolios under management and the fact that robo advisors do not generally disclose their average returns publicly, we are unable to opine on the historical performance of any robo advisor and have confined our analysis primarily to fees charged.

Fees quoted were collected and accurate as of February 1st, 2022. We used both expense ratios and annualized monthly fee quotes for the purpose of calculating both costs and returns. Some one-year expense ratios quoted were converted from annual fixed fee structures. These converted ratios are likely to shift alongside changes in portfolio sizing.

Sources

​​1. Fidelity Go - Affordable Money Management. (n.d.). Fidelity. Retrieved February 1, 2022, from Fidelity 

2. How does M1 compare? (n.d.). M1 Finance. Retrieved February 1, 2022, from M1 Finance

3. Intuitive Investor. (n.d.). Wells Fargo Advisors. Retrieved February 1, 2022, from Wells Fargo Advisors

4. Invest for the long term on your terms. (n.d.). Wealthfront. Retrieved February 1, 2022, from Wealthfront

5. Management Fees | blooom Retirement Planning for All. (n.d.). Blooom. Retrieved February 1, 2022, from Blooom

6. Our Pricing. (n.d.). Betterment. Retrieved February 1, 2022, from Betterment

7. Our Strategy. (n.d.). Titan. Retrieved February 1, 2022, from Titan

8. Plans. (n.d.). iFlip. Retrieved February 1, 2022, from iFlip

9. Vanguard Digital Advisor. (n.d.). Vanguard. Retrieved February 1, 2022, from Vanguard