You won’t get rich by saving money.
You can work 80 hours per week, chase promotion after promotion, and save 80% of your income, but you’ll still be on the slow track to wealth. In fact, every dollar you save is losing value to inflation every year. In order to maximize your financial potential, you need an investment strategy. This isn’t optional.
Investing has the potential to be one of the smartest things you do. It allows you to put your money to work, multiplying the power of every dollar you earn.
Creating an investment strategy can seem intimidating, but, modern tools have made investing easier than ever. You don’t need to spend weeks reading financial books and researching hot stocks nor do you need to pay a hefty fee to a financial advisor. Robo-advisors aim to democratize investing by harnessing the power of technology.
What is a Robo-Advisor?
Financial advisory services have been around for a long time. The industry works something like this. You pay an advisor to manage your money and, in return, the advisor takes a small percentage every year. This fee generally ranges between 1-2% depending on the advisor, and the fee is paid regardless of whether or not your portfolio is profitable.
This advisory fee can quickly eat into your returns, and when you consider the fact that your advisor is probably just picking a few mutual funds, you may want to think twice. This is how the management fee adds up on a $10,000 investment that returns 10% per year:
While it may be nice to have your money managed for you, you don’t want to be charged excessive fees that limit your long-term returns.
This is where robo-advisors come in. Robo-advisors are designed to be a more cost-effective financial advisory solution.
While the name itself might sound complex, robo-advisors are actually quite simple. These advisors create investment portfolios based off of automated strategies.
Here’s how the process usually works:
- Enter your investment goals and personal financial situation
- Choose your risk threshold and/or asset allocation
- The robo-advisor builds a custom portfolio
Setting up your account is easy, and since this approach requires less human involvement, the fees are much lower (generally between 0.25%-.5%).
This automated approach shouldn’t be mistaken for a rigid “one-size-fits-all” investment strategy. In fact, many of the top robo-advisors pride themselves on their flexibility in creating and rebalancing portfolios.
These automated portfolios are built to fit unique investment strategies for a variety of financial goals. For example, a college student may prefer a more aggressive portfolio comprised heavily of growth stocks whereas a retiree may prefer an income-generating portfolio consisting of bonds and dividend stocks.
Here are some of the key reasons someone may choose a robo-advisor over an in-person advisor, ETF, or mutual fund:
- Lower advisory fees (compared to human advisors)
- Automated management
- Lowering taxes (for certain robo-advisors)
Robo-advisors are growing increasingly popular, but the question is, can they deliver?
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Once you start doing some research on robo-advisors, you’ll realize there are quite a few options to choose from. I wanted to put these advisors to the test with real money – $25000 in cold hard cash.
We’ll get to the details of the experiment soon, but first let’s discuss the reasoning behind this case study.
In case you didn’t notice, this site is primarily focused on day trading. While trading and investing share many similarities, the methodology behind each of them is very different. Traders are highly-involved and reactive whereas good investors are patient and passive in their approaches.
Trading is not a replacement for investing and, whether you trade or not, an investment plan is essential.
I’ve found that I need to separate my trading and investing efforts for two main reasons.
First, the separation allows me to apply different strategies. As a trader, I’m trained to react. I watch my positions every day and react to price fluctuations. This highly-involved approach to position management works great for trading but it’s not conducive to an effective investment strategy. In the past, when I’ve traded and invested through the same platform, I became impatient and treated my investments as trades.
Second, investing allows me to increase my capital exposure. Day trading is risky and I would never trade with a large percentage of my net worth – that type of risk exposure is foolish. With investing, I have more conservative performance goals (i.e. yearly returns), but I can use more of my capital. Whereas a 10% annual return wouldn’t justify the work involved in day trading, it would be a great return on an investment portfolio that required minimal management.
Why the Experiment?
There are plenty of different ways to invest in the stock market. You can invest in individual stocks, mutual funds, ETFs, and bonds. Ultimately, the strategy you select will have a major impact on your long-term returns.
I’m always experimenting with new investment strategies. I’ve tested research and recommendation services like Motley Fool’s Stock Advisor, Motley Fool Everlasting Portfolio, and Zacks Premium. I utilize my own research strategies using screeners like FinViz, IBD, and Trade Ideas. I’ve pretty much always used a hands-on approach to investing, but I wanted to see what it was like to let someone else take the wheel. I recently became interested in robo-advisors. While I’ve had experience with mutual funds, ETF’s, and even in-person financial advisors, I have never used a robo-advisory service until now.
Like you, the main questions I had when doing my research were:
- How much can I make using a robo-advisor?
- How does this robo-advisor compare to alternatives?
Most robo-advisor sites go on and on about features, but very few show specific performance numbers. Even when I was researching third-party content and reviews, I couldn’t find many people talking about exactly how much they made using a specific robo advisor.
There’s definitely a lot of hype around robo-advisor services, but is it merited? That’s what I’m here to find out.
How the Experiment Will Work
My goal is to track the relative performance of some of the top robo-advisors. While investing is a long-term game, I’m still a trader, which means I’m impatient. I will be posting updates every month to compare the performance of each service.
Here’s how the experiment will work:
- I will be putting $5,000 into accounts at five of the top robo-advisory services.
- The target risk level will be moderate for each advisor. (see note #1)
- Every month, I will compare the performance of the robo-advisors and update this post
- The SPY ETF will be used as a benchmark to see if fancy, robo-strategies can beat the market. (see note #2)
Note #1: Every robo-advisor has unique portfolio styles, so it will be impossible to compare apples to apples, but I’ll do my best to keep the data accurate by selecting similar portfolio styles.
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Note #2: The SPY ETF is an ETF that closely tracks the performance of the S&P 500. The majority of mutual funds do NOT beat the market so this makes for an appropriate comparison.
Robo Advisor Comparison
The following were selected as the top robo-advisors for the test based on the fund sizes (AUM) and the uniqueness of the services. Many traditional brokers offer automated portfolios, but all of the selected companies (with the exception of Ally Invest) are exclusively robo-advisory services.
I will be selecting similar portfolios to keep the comparison as accurate as possible. Here’s the setup:
IMPORTANT: A Note on the S&P 500 Benchmark
As you will notice above, most of the robo-advisor portfolios have a 65/35 split between stocks and bonds, whereas our benchmark (ticker: SPY) is 100% stocks.
Is this a fair, apples-to-apples comparison?
No, but this is deliberate. I could just as easily benchmark against both a broad market ETF and a bonds ETF, but I won’t be doing so for two reasons.
First, I want to compare investment strategies, not portfolios. I’m not trying to see if I can build a portfolio that will outperform these robo-advisors. I want to compare two simple investment strategies: building an automated portfolio and investing in a broad market fund. Many leading financial advisors recommend investing in a broad market ETF or mutual fund and it is incredibly easy for any amateur investor to invest in a single ETF like the SPY (without paying any management fees associated with these advisors). Can robo-advisors offer any advantage over this simple investment strategy?
Second, I didn’t choose the robo-advisor portfolio allocation; I chose a risk level. Stocks are considered higher-risk, whereas bonds are considered lower-risk. Once I set my risk level, the robo-advisors determined the portfolio allocation. While these diversified portfolios may not capture as much upside as a portfolio comprised of 100% stocks, they should limit the downside risk. We will see if that holds true.
The results are below – you’re welcome to use your own benchmarks for comparison.
Robo Advisor Performance Reports
All of the accounts have been funded with $5,000. This section will be updated monthly to reflect performance.
June 2019 (Starting Month)
I started funding accounts on June 3, 2019. The account opening process was simple, and most accounts were funded within two days of the initial deposit.
Each account received a $5,000 deposit and I was happy to discover that the portfolio value fluctuates in real-time (or close to it). I appreciate the real-time performance updates, as many mutual funds will only report performance at the end of the day.
Robo Advisor Funding Times
- WealthFront, Acorns, and Betterment allocated funds within 2 days of the deposit
- WealthSimple allocated funds within 3 days of the deposit
- Ally Invest allocated funds within 4 days of the deposit
As mentioned above, we’ll be using the SPY ETF as a benchmark comparison. This is a hypothetical account as I didn’t find it necessary to actually place this trade in order to track it.
We’ll be using the closing prices for all references and dividends will be factored into our analysis (Note: benchmark numbers will NOT factor in dividend reinvestment. They will just add dividend payments to the total return).
- $5,000 would buy 18.21 shares of SPY at 274.57 on June 3, 2019
I recognize that the SPY is an ETF that only tracks stocks whereas the robo-advisor portfolios have both stocks and equities. This was done intentionally to see how a managed portfolio performs against one of the most popular index funds (which many respected financial advisors advocate). Most robo-advisors associate bond allocation with safety, meaning the upside may be limited, but the downside should be as well (we’ll see that this isn’t the case later).
Obviously, it’s too early to draw any conclusions from this project and, ultimately, portfolio performance will be the guiding metric, but here are some of my first impressions:
- Betterment has the best portfolio flexibility because it allows clients to pick their exact stock allocation percentage, whereas the other advisors use pre-built portfolios with fixed percentages based on risk thresholds.
- Ally Invest has the slowest fund allocation process and the least user-friendly interface.
- While it may seem nit-picky to worry about a difference of a couple days for funding, it can actually have a noticeable impact, especially for those who like to time their entries. During the period between June 3, 2019 and June 7, 2019, the S&P 500 (SPY) had a range of 5.78%, meaning every extra day it took to allocate funds led to a missed opportunity of ~1% of upside in the portfolio.
All accounts were funded on June 3, 2019. Here’s what the accounts look like as of June 12, 2019:
Wealthfront Starting Performance
Portfolio Value: $5,062.22
Wealthsimple Starting Performance
Portfolio Value: $5,049.46
Betterment Starting Performance
Portfolio Value: $5,054.00
Acorns Starting Performance
Portfolio Value: $5,060.86
Ally Invest Starting Performance
Portfolio Value: $5,005.28
SPY Benchmark Performance
Portfolio Value (Hypothetical): $5,250.02
Performance updates will be posted here during the first week of every month.
Feel free to bookmark the page to stay updated.
July 2019 Update
The account funding date was well-timed and the market has pretty much been straight up since the initial entry.
Here are the returns for each robo-advisor this month:
- SPY (Benchmark): +$461.12
- Betterment: +$195.09
- Wealthfront: +$189.48
- Acorns: +$188.84
- Wealthsimple: +$158.10
- Ally Invest: +$133.12
The SPY ETF (tracking the S&P 500) yielded more than double the returns of every robo-advisor. In fairness, we need to remember that these portfolios have a ~60/40 equities/bonds split, so only ~60% of the portfolio benefited from the moves in the S&P 500.
Equities will always be more volatile than bonds and this split was designed to hedge downside risk. A higher proportion of equities will benefit the portfolio when the market is going up but it will also increase the downside risk when the market is going down.
We’ll continue to monitor performance to see how these portfolios perform in the long run.
August 2019 Updates
Here are the results for the past month:
- SPY (Benchmark): +$198.71
- Wealthsimple: +$98.81
- Acorns: +$47.65
- Wealthfront: +$25.36
- Betterment: +$15.39
- Ally Invest: -$10.70
These results are being posted after the market took a major hit today. This month provides some interesting insights. As we saw last month, the SPY ETF outperformed all of the robo-advisors. I’d expect portfolios that limit upside to also minimize downside but that wasn’t the case.
What’s interesting is how the robo-advisors shuffled in rank. Here are the insights:
- Once again, the SPY ETF outperformed all of the robo-advisors by a considerable margin.
- Wealthsimple went from the second worst performing advisor during a good month to the top performing advisor during a bad month
- Betterment and Wealthfront gave up almost all of their gains and found themselves at the bottom of the list
- Acorns is performing surprisingly well. It was pretty close to the leaders during a good month and it retained more gains during a bad month.
- Ally Invest is in last place again, with lackluster performance during a good month and even worse performance during a bad month. It’s the only portfolio to go red so far.
October 2019 Updates
I will be switching to posting updates every couple of months or so. As of October 22, 2019, here is the performance update:
- SPY (Benchmark): +$495.97
- Acorns: +$262.13
- Wealthfront: +$236.10
- Betterment: +$221.05
- Ally Invest: +$180.28
- Wealthsimple: +$159.71
Main takeaways for this month:
- The SPY ETF continues to outperform all other investments. As more time passes, this becomes even clearer. The SPY investment is 2x most other investments and 3x the worst performing (Wealthsimple).
- Acorns shot up to the lead this month which surprised me. I’ve always considered Acorns a bit gimmicky but money talks loudest. Acorns not only has the lowest fee, but they also have the best performance to date.
- Wealthsimple is underperforming AND charging the highest management fee. For a firm that is charging double the management fee of the competition, I would expect much better performance.
- Ally Invest removed their management fee this month (previously 0.30%). The portfolio is still lagging compared to the others in the test, but this reduced management fee may have longer term impacts.
March 23, 2020 Update
The market has been on a wild ride lately. On March 23, 2020, the S&P 500 put in a short-term bottom. Here’s what the performance looked like for each robo-advisor on the close of that day.
- Wealthsimple: ($481.18)
- Ally Invest: ($742.52)
- Acorns: ($743.01)
- Wealthfront: ($831.81)
- SPY (Benchmark): ($834.53)
- Betterment: ($903.82)
- Wealthsimple and Ally Invest had some of the poorest performance when the market was going up BUT they were some of the best performers when the market went down. What these portfolios lacked in upside profit maximization they made up for in downside risk minimization. This is exactly what I’d expect from an effective risk-balanced portfolio.
- Acorns continues to perform exceptionally well. While the portfolio rankings have been shifting every month, Acorns has been ranked in the top 3 positions almost every month.
- The SPY (Benchmark) performed exceptionally well under bullish conditions, however it was exposed to the most risk when the market turned bearish. It quickly fell from the top spot in our rankings to the #5 spot. Keep in mind that all of the robo-advisor portfolios are comprised of ~60% stocks and ~40% bonds. Considering the stock market was hit hardest, the SPY’s major drop makes complete sense (as it is 100% stocks).
April 8, 2020 Update
On April 8, 2020, the market continued an impressive rally off of its lows. Here’s how the robot-advisors recovered.
- SPY (Benchmark):+$95.64
- Wealthsimple: +$66.08
- Acorns: ($123.54)
- Ally Invest: ($173.34)
- Wealthfront: ($168.22)
- Betterment: ($286.04)
- (SPY Benchmark) is clearly the most volatile investment. It has been the top performer (#1 spot) for every month besides March when the market dropped sharply. While the drop highlighted the risk of this investment, the subsequent rally showed how fast it can recover.
- Wealthsimple, which was the poorest performer in October 2019 when the market was rallying, has handled the recent market volatility very well. This portfolio limited downside risk better than any of the other portfolios (by a long-shot) and it is is currently the only profitable portfolio.
- Acorns finds itself in the #3 spot yet again, meaning it offers some of the most consistent performance.
February 9, 2021 Update
It has been awhile since I posted an update. In 2020, the market experienced more volatility in a few months than it normally would in years. A lot of the insights I was looking for were expedited. Here are a few things we learned:
- Which portfolios perform best during market strength
- How well each portfolio manages downside risk during market weakness
- How each portfolio handles market volatility
- How a portfolio may recover after a short-term crash or bear-market
Here are the updated returns as of February 9, 2021:
- SPY (Benchmark): +$2,290.03
- Wealthfront: +$1,516.11
- Ally Invest: +$1,404.17
- Betterment: +$1,358.47
- Acorns: +$1,308.57
- Wealthsimple: +$1,064.34
- Assuming the market recovers from short-term crashes (which, historically, it always has), it’s difficult to beat the performance of the SPY (or some other total market fund). While the SPY benchmark portfolio was susceptible to the most short-term volatility, it has performed the best overall.
- The robo-advisors didn’t do the best job of minimizing downside risk (review the March 23, 2020 update) and only recovered when the SPY recovered. Therefore, it’s hard to see what real value they add to an investor looking for a simple investment strategy. I respect each of these companies and they all have great platforms but, from a performance perspective, they are unable to match the returns of a very simple investment strategy nor are they able to minimize risk as well as I had hoped.
I will continue to post the occasional update, but the insights are pretty clear at this point.
In October 2020, I started using M1 Finance as an alternative to robo-advisors (read the full review here). I created a portfolio built around ETFs, Motley Fool stock picks, and my own personal stock picks and it has considerably outperformed all of the robo-advisors as well as the SPY benchmark (up 38.37% to date). I won’t be including the M1 Finance portfolio in this comparison, but I see it as the most viable option for investing on autopilot. You simply choose your stocks, choose your allocations (i.e. percentage of each stock in your portfolio), make deposits, and M1 Finance automatically invests for you (without management fees). If you prefer, you can choose from a variety of pre-built portfolios within the app. While this approach requires a bit more upfront work, it gives you more control over your portfolio and may help you maximize returns.
November 15, 2022 Update (Closing Accounts)
I closed a few of these accounts over the past couple of years.
I closed the Wealthsimple account when the company stopped accepting US accounts (they transferred that business to Betterment but I withdrew funds instead).
I closed the Acorns account a few months after the company increased the monthly management fee from $1/month to $3/month. That fee increase may be insignificant for larger accounts, but it represents 0.6% for a $5,000 account.
Here are the gains at the time of closing each account:
- Wealthsimple: +$1,007.61 (Closed on April 13, 2021)
- Acorns: +$1,570.24 (Closed on April 1, 2022)
The following accounts are still open (with SPY as a benchmark).
- SPY(Benchmark): +$2,626.81
- Wealthfront: +$1,935.83
- Ally Invest: +$896.83
- Betterment: +623.47
I will likely be closing the Betterment account soon as the company will be increasing the management fee from 0.25% of assets to $4/month (~0.8% on a $5,000 account). The Wealthfront account has been performing pretty well – performance from the Ally Invest and Betterment accounts is lackluster. And, a simple investment in $SPY is outperforming every robo-advisor (even during this correction / bear market),
Robo Advisor Performance Chart
Additional Q&A on Robo-Advisors
The whole goal of this case study was to determine whether or not robo-advisors are worth using. After actually using the top robo-advisors for almost two years, we can finally answer some important questions. This case study could not have taken place at a better time. The market experienced periods of both stability and exceptional volatility which allowed us to better understand how robo-advisors may perform in a variety of different market conditions.
Every investor has their own unique goals, but I think most investors would prioritize the following:
- Maximizing Returns
- Minimizing Risk
- Limiting Avoidable Fees
Most investors want to capture as much upside as possible. This doesn’t require much of an explanation. We all want to make as much money as possible on our investments. Of course, risk tolerance plays a role as well. Many investments are “high risk, high reward,” which means they may be acceptable for younger investors but less so for those approaching retirement. Therefore, minimizing risk is important. We also want to make sure that fees don’t eat into our upside (i.e. management fees, advisory fees, etc.)
With that said, let’s answer some of the most common questions about robo-advisors.
How Good Are Robo-Advisors?
As implied by the name, robo-advisors are simply digital financial advisors. Instead of going to your bank or broker for advice, you rely on a digital service that automatically builds and manages a portfolio for you. So, how good are these services?
There are two things worth considering.
- How do robo-advisors compare to human advisors?
- How do robo-advisors compare to other investment strategies?
I would argue that robo-advisors are as effective as human advisors. I’ve worked with financial advisors in the past and achieved similar results from both human advisors and robo-advisors. One benefit of robo-advisors is the fee structure. I was able to achieve lower advisory fees and lower asset management fees (i.e. ETFs vs mutual funds) with the robo-advisor.
One area where most advisors fall short is performance relative to broad market performance. Simply put, the majority of active investment management strategies do not beat the S&P 500. There are dozens of studies that prove this time and time again. Our robo-advisor study, albeit at a small scale, offered proof yet again.
Are Robo-Advisors Safe?
Robo-advisors are susceptible to the same market risks as any investment strategy. Investment risk is always present whether you use an online broker, human advisor, or robo-advisor. If you are wondering whether or not robo-advisors can be trusted with your funds, the short answer is yes.
The most popular robo-advisors (such as those in our case study) are SEC-registered and offer SIPC insurance on investment accounts. Personally, I also like to look at the size of a robo-advisor before parking my funds there. You can research the dollar volume of assets under management as well as the total number of users.
Are Robo-Advisors Worth It?
This question is a bit subjective. Robo-advisors do what they claim they do. This includes:
- Building an automated investment portfolio
- Utilizing tax-efficient strategies
- Offering customizable investment portfolios built for specific investment goals
- Selecting cost-efficient funds with low management fees
- Offering lower advisory fees than many human advisors
- Offering a quick and easy approach to investment management
If the above list is what you are looking for, robo-advisors are worth it. With annual management fees as low as 0.25%, robo-advisors offer a cost-effective investment advisory solution.
That said, they fall short in two areas:
- Full customization
- Maximizing Returns
As mentioned repeatedly throughout this case study, the robo-advisors we tested could not outperform the S&P 500. Similarly, they could not limit downside risk as well either. That said, this isn’t unique to robo-advisors. Many individual investment strategies and mutual funds cannot beat the S&P 500 either (yet these strategies may be incredibly popular).
The other downside of robo-advisors is that they don’t allow you to fully customize your investment strategy in the way you would be able to in a traditional brokerage account. For example, if you wanted to purchase individual stocks (i.e. Apple, Amazon, etc.), you could not do this with most of the robo-advisors we tested. This isn’t a deal-breaker for many investors, but it is worth considering before you open an account.
Should I Use a Robo-Advisor?
In order to determine whether or not you should use a robo-advisor, consider where you are right now and where you want to go.
- Are you trying to replace your current investment advisor or are you just getting started with investing?
- How much control do you need over your investments?
- Are you interested in investing in specific stocks?
- Is convenience your main objective?
Robo-advisors definitely offer a great alternative to traditional (human) financial advisors.
If you value convenience over all other factors (customization, performance, etc.), robo-advisors are a good pick. If you prefer to have more control over your investments and you aim to maximize your returns, you will likely get more value out of traditional brokers (or customizable services like M1 Finance).
Which Robo-Advisor is Right for You?
Once you decide that robo-advisors are a good fit for you, it’s time to pick your advisor. You can start by reviewing the data from the case study in this article. Keep in mind, we only tested one portfolio style (~60% stocks and ~40% bonds) over two years, and performance may vary.
You may also consider what other features are important to you, including:
- Account types offered
- Tax-loss harvesting
- Automated deposits
- Company trustworthiness/size/age
- Bank accounts offered
- Unique features (i.e. round-up)
Here are some examples:
- Ally Invest is the oldest company on the list (founded over 100 years ago)
- Betterment has the highest AUM (29 billion)
- Acorns offers a round-up feature for easy investing
- M1 Finance offers a blend between robo-advisory and traditional brokerage features
Do your own research and don’t hesitate to reach out to the companies to make sure they are a good fit.
9 thoughts on “Best Robo Advisors: The $25,000 Comparison Case Study”
Any updates to this? Interested in September performance.
Yes, I owe an update. I will post in the coming weeks.
Can we get another update? Curious to see what happened months later.
Thanks Dave! Cool case study by the way, I can’t find much other content like this.
Yeah I will post another update soon.
Great case study! I hope you continue to feed us updates from time to time if you are able to do so! Would love to see how this continues to play out.
I hope updates come out soon.
Very interesting article, would love to hear an update for DEC-2020
Great case study. Any updates for year ending 2020.
Also, for a better benchmark you may want to put a 60% SPY and 40% A Bond Fund to see how it compares.
Yeah, I will update again soon. We ended up experiencing more market volatility in a few months than we usually do in a few years, so a lot of the insights were expedited.
You are correct that a “60% SPY, 40% Bonds” benchmark would be more of an “apples-to-apples” comparison, and anyone is welcome to benchmark the data as they choose. My goal was to see if any of these advisors could beat an investment strategy as simple as investing in the S&P 500.