Fees
While all robo-advisers look cheap compared to human advisers, some cost significantly more than others. For example, Wealthfront customers pay no commission, no advisory fee for the first $10,000 under management and 0.25% on amounts more than $10,000, FutureAdvisor charge 0.5% of assets and investors need to pay some trading commissions as well.
If a robo-adviser charges no fee (Schwab is an example), you need to ask how does it make money? (Schwab's recommended portfolio consists of a certain percentage of cash, of course that cash will be put into a deposit account at Schwab bank, generating income for Schwab)
Tax-loss Harvesting
Most robo-advisers tout tax-loss harvesting service as a return boosting service, however, sometimes after tax-loss selling, the fund will be put into a sub-optimal ETF that doesn't provide the same market exposure or performance as the one sold out.
In addition, tax-loss harvesting is not for everyone - for people in the 15% tax bracket, their long term capital gain tax is 0%!
Ancillary Services
Before you switching to a robo-adviser, make sure consider what ancillary services you might need, this is especially important for people near or in retirement, because a structured portfolio distribution strategy is needed at this life stage. Vanguard's service offers a customized drawdown strategy for people approaching retirement. Many robo-advisers do not offer such service, nor do they service investors with tax-deferred accounts.
Finally, consider if access to a human advisor is needed later on, some robo-advisers do not offer such access, while some do.
In our next blog post, we will discuss some other big risks associated with robo-advisers, which not just applicable to retirees who are considering robo-advisers.