Robo-Advisor vs DIY Investing: What the Fee Costs Over 20 Years

A robo-advisor is an app that invests for you. You answer a few questions, it picks a mix of index funds, and it keeps that mix in shape as markets move. You never choose a fund.

The other way is to do it yourself. You open an account, buy a cheap index fund every month, and leave it alone.

Both can work. The question is what the robo's convenience costs. So we priced it, using each provider's own published fees, over 20 years.

What a robo-advisor does for the fee

• Picks a mix of funds for you, based on how much risk you say you can take.
• Rebalances it. If shares rise and now make up too much of the pot, it sells some and buys bonds to get back to your mix.
• Invests your monthly deposit automatically.
• In the US, many also do tax-loss harvesting. That means selling a fund at a loss to cut your tax bill, then buying a similar one.

None of that is hard to do yourself. The real question is whether you will.

The two costs you're paying

Every fund charges a yearly fee, called the expense ratio or ongoing charge. You pay it whether you use a robo or not.

A robo then adds its own management fee on top. That fee is the price of the service, so it's the number to compare.

Both are charged every year on your whole pot, not on what you put in that year. So as the pot grows, the fee in pounds grows with it.

The UK example: £11,150 over 20 years

Say you start with £10,000 and add £200 a month for 20 years. That's £58,000 of your own money. We assumed 5% a year growth before fees.

The robo is J.P. Morgan Personal Investing (formerly Nutmeg), on its fully managed portfolios. It charges 0.75% a year on the first £100,000 and 0.35% above that. Its funds cost another 0.18%, plus about 0.04% in trading spread. On a £20,000 pot that's 0.97% a year all in.

The DIY version is one fund: the Vanguard FTSE All-World UCITS ETF (VWRP), which holds about 3,800 companies worldwide. Its ongoing charge is 0.14% a year. We assumed an app with no platform fee.

The robo's fees came to £9,083, about 16% of everything you put in. The gap at the end is bigger than that, at £11,150. That's because money paid in fees also stops growing.

The US example: $3,598 over 20 years

US robos are much cheaper. Betterment's Digital plan and Wealthfront both charge 0.25% a year. Both use low-cost index ETFs, so we assumed you'd hold similar funds either way. That leaves the 0.25% as the only difference.

One detail on Betterment: it charges $5 a month instead of 0.25% on balances under $24,000, unless you deposit at least $200 a month. On a small pot, $5 a month is a far bigger share than 0.25%.

Wealthfront says its tax-loss harvesting typically covers its fee several times over. That's the company's own claim. Harvesting only helps in a taxable account, and how much depends on your tax situation and how markets move.

When a robo-advisor is worth it

• You'd otherwise leave the money in cash because picking funds feels like too much. A robo that gets you invested beats a perfect plan you never start.
• You know you'd be tempted to sell in a crash, and a hands-off app makes that less likely.
• You want a mix of shares and bonds kept in balance, and won't do the rebalancing yourself.
• You're in the US with a taxable account, where tax-loss harvesting can claw back part of the fee.

When doing it yourself is better

• You're happy to buy the same fund every month and not look at it much.
• You want all shares, so one global fund already does the job and there's nothing to rebalance.
• Your pot is big. A percentage fee on a large pot is a lot of money every year.

There's a middle option too. An all-in-one fund holds shares and bonds in a fixed mix and rebalances itself. It usually costs a little more than a single index fund and less than a robo. Our balanced fund article covers how they work.

Wherever you live, the check is the same. Find the robo's management fee, add the fund costs, and compare that with one cheap index fund on a low-cost platform.