Free and Low Fee Robo-Advisors Still Need to Make Money
How robo-advisor make money can be confusing, especially with the availability of free-robo advisors.
In fact, robo-advisors are frequently praised for their low- or no-free structures, meaning that those who invest in them are often getting a great deal. After all, with fewer overhead costs and salaries to pay, robo-advisors can instantly pass on savings to their clients.
But while robo-advisors have proven their ability to perform as well, if not better, than their human counterparts, there are still some questions investors want answers to.
*Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link.
A big one is: how do robo-advisors make money?
The quick answer is that it depends! A robo-advisor makes money in different ways. Here are some of the most popular.
How Do Robo-Advisors Make Money Through Your Assets? The Easy Answer: Fees
Robo-advisors typically charge some sort of asset management fee, even if that fee is very low. The fee is charged as a percentage of the amount invested or assets under management (AUM) Robo-advisors typically have very low costs associated with their maintenance. Combine this with the fact that they have billions of dollars under management. So, even if they all charged 0.15% they would still make a good deal of money.
So, if you invest $10,000 with Wealthfront then the robo earns 0.25% of your money every year. This fee amounts to $25 that goes directly to Wealthfront to cover the firms expenses.
There is one fee you want to look out for, though: the fund’s management expense ratio. This is a fee that is not paid to the robo-advisor itself, but instead goes to the fund company. This fee is one of the ways that financial firms make money.
The fund management expense ratio is a flat fee paid to the exchange traded (ETF) or mutual fund to manage the fund, regardless of whether or not you make money on your ETF or mutual fund investment. Some fund expense ratios are higher than others, but that isn’t always an indication of performance. Although, funds with lower expense ratios leave more money to be invested as less is going into the pocket of the fund manager.
So, while expense ratio fees are something you typically pay, they do not help the robo-advisor make money. To understand how much money is going directly to the robo-advisor look at the robo-advisory management fee.
Sign up for the FREE robo-advisor comparison chart to access the fees for all of the major robo-advisors, in one place.
How Do Robo-Advisors Make Money if They Don’t Sell Your Data? They Sell Products and Services
That’s right—robo-advisors can still make money while keeping your data safe!
The good news is that most robo-advisors don’t need to sell your personal information to third parties in order to make money.
For example, M1 finance offers free investment management. But, if you want access to margin, two trading windows, and cash management, you’ll pay a small annual fee for M1 Plus.
Betterment sells a la carte financial planning packages. So, in addition to the 0.25% management fees, if a Betterment Digital customer wants financial advice, she can pay for a financial planning package. These add on services are good for both the consumer and the company. The consumer only pays for the services she wants. And the company has another revenue stream.
Additional Services Robo-Advisors May Charge For
Some robo-advisors may make money through smaller service fees. Examples of this might be termination fees, or charges for expedited deposits, wire transfers, or other transfer fees. While not be overly expensive, additional fees overall go to helping provide affordable asset management.
How Do Robo-Advisors Make Money if They’re Part of a Larger Company? They Leverage Their Resources
Many robo-advisors are also part of larger companies, such as TD Ameritrade or Schwab Intelligent Portfolios. While “big businesses” get a pretty bad rap, investing in a robo-advisor with one of these larger companies can actually be great for your wallet.
Schwab Intelligent Portfolios, for example, charges no advisory or commission fees. They can do that, because money from other parts of the company supports the robo-advisor platform. Additionally, Schwab requires that all accounts hold a percentage of cash. The cash can be lent to other consumers to earn the company more money. Additionally, Schwab, Fidelity Go, Vanguard’s robo-advisor also include their own proprietary funds within the robo investing portfolios. As discussed above, the proprietary funds earn money from the fund’s management expense ratios.
Additionally, companies can also earn money from other fund families when the robo receommends their funds. So, when TD Ameritrade’s robo advisor purchases ETFs from third parties then TD might receive compensation from these companies. This means that TD Ameritrade is paid just for giving you access to these ETFs, much in the way a blogger might make money through recommending a product or service.
Robo-Advisors Branch Out: Non-Investment Services
Some robo-advisors, such as the free robo-advisor M1 Finance, offers loans in addition to money management. The lending platform charges the investor interest on the money borrowed. The difference between the cost of the funds and the interest charged is profit to the company. Thus, another way for the robo-advisor to make money.
For example, M1 Finance charges interest on loans to investors in the platform, which could be used for any purpose and repaid on the borrower’s schedule. M1 Finance allows clients to borrow up to 35% of their existing portfolio.
M1 Finance also makes money through securities lending, which makes this a resourceful (and still free!) robo-advisor.
Check out the M1 Finance platform:
How Do Robo-Advisors Make Money? Recommendations
While the above-mentioned example are the most common ways robo-advisors make money, they might also use two other, less-common ways to make up for not charging fees.
Some robo-advisors might sell ad space on their apps or websites, so that clients can see related, relevant ads. The robo-advisors might sell the ad space for a flat rate or be paid according to the number of clicks or sign-ups.
Robo-advisors might also promote complementary services to help clients round out their investment strategies. They might do this by offering clients a deal on a third-party service, or simply recommending the service. This sort of promotion happens frequently on blogs and websites. However, clients should perform due diligence in researching any recommended services as not all financial products are created equal.
How Do Robo-Advisors Make Money Wrap up?
The most common ways robo-advisors make money are through management fees, reflected as a percent of your total investment. Robo-advisor management fees range from zero up to 0.89% of AUM. Although, there are robo’s that charge a monthly fee, like Blooom, the robo-advisor for your 401(k), Schwab, and Ellevest.
Robo-advisor management fees are usually lower than those you would pay to a human financial advisor.
Robo-advisors also make money selling premium features for set rates, using other services throughout their company to support the platform, and, on occasion, promoting third party services that complement their own offerings.
Bonus; List of 30 Top Robo-Advisors
Robo-advisors make money through various methods, and clients would be smart to search for an earnings disclosure for any robo-advisor they decide to use. Not all robo-advisors are completely transparent with such statements, but robo-advisors like Schwab Intelligent Portfolios are very clear on their websites about how they earn enough money to stay in business.
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- How Much Money Can You Make With A Robo Advisor?
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.
I have robo-advisor accounts with M1 Finance and Schwab Intelligent Portfolios.