ComparisonsRobo-Advisor Strategy

How Do Robo-Advisors Make Money? You Might be Surprised!

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.

A big one is: how do robo-advisors make money?

The quick answer is that it depends! Robo-advisors make 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.

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.

The fund management expense ratio is a flat fee, regardless of whether or not you make money on your ETF or mutual fund investment. Some 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. You’re much better off looking at the AUM fees to understand how much money is going directly to the robo-advisor.

How Do Robo-Advisors Make Money if They Don’t Sell Your Data? They Sell Products

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. WiseBanyan even explicitly states on their website that they do not sell information or get kickbacks for promoting other financial services.

WiseBanyan is a robo-advisor that makes money through selling a la carte services to customers who will actually use these features, instead of charging everyone a blanket rate for services they won’t ever utilize. So, while the basic robo-advising features are free to all WiseBanyan customers, those who want to take their investments to the next level or receive more personalized service can make these as-needed service purchases.

Additional Services Robo-Advisors May Charge For

Although the a la carte features WiseBanyan offers are usually package deals, 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.

Betterment offers three tiers of service, and a la carte packages as well. The basic digital service costs 0.25% AUM while the premium service is 0.40% and offers access to human financial advisors. They also offer fee for service financial planning packages.

How robo-advisors make money

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.

So, when Schwab Intelligent Portfolios purchases ETFs from third parties then the firm might receive compensation from these companies. This means that Schwab Intelligent Portfolios 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. As of October 2018, M1 Finance charged 4% 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.

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).

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 WiseBanyan and Schwab Intelligent Portfolios are very clear on their websites about how they earn enough money to stay in business.

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.

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Barbara A. Friedberg, MBA, MS

Barbara A. Friedberg, MBA, MS

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