Robo advisors charge in two ways. First, you’ll pay a management fee, if one applies. Second, you’ll likely be charged fees by the funds your robo advisor chooses for you. Here’s how to assess those fees:
The first fund to look for is the management fee. This is a fixed fee that robo advisors charge for choosing your investments and other services they provide. Depending on the robo advisor you choose, you can expect to pay anywhere from 0% to around 0.50% per year based on your portfolio balance, though some charge more.
Even after you’ve paid your management fee, you’re still not done paying. Each fund that the robo advisor picks for you likely charges its own fee. While some exchange-traded funds (ETFs) may charge more, most robo advisors make a point of keeping client funds in low-fee funds.
Let’s say you invest $50,000 with a robo advisor that charges 0.25% annually. In your account, the average ETF fee is 0.7%. Here’s how much you would pay:
- Management fees: $50,000 x 0.25% = $125
- Fund fees: $50,000 x 0.07% = $35
- Total fees: $160
Even if you pick your own investments, you’ll likely have some ETFs or mutual funds that charge fees, so that 0.7% may be unavoidable either way. But the management fee charged by the robo advisor is the biggest chunk of the cost, so it’s important to shop around to avoid overpaying.