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Robo-advisors advertise no fees and no commissions. How does it get any better than that, right?
You may come across hidden fees, though. What are these hidden fees? It may surprise you.
Honestly, they aren’t necessarily hidden, as you can always find a list of fees on the robo-advisor’s website with a little digging. While the robo-advisor may not advertise that they charge add-on fees or trading fees, you can find them.
The fees, however, come as a bit of a surprise to some, especially when they take a robo-advisor’s advertisements at face value.
I love robo-advisors and all the convenience and security they offer, but I know enough to look for those surprise fees because I like to keep my earnings as much as possible, otherwise, why invest, right?
Check out the five fees you should watch out for and also learn where to spot these not-so-hidden fees.
1. Management Fee
The management fee isn’t hidden.
Robo-advisors are typically upfront about this fee. This is how many robo-advisors make money. Most charge a percentage of assets under management. Like Betterment, for example, charges 0.25% of assets under management. If you have $10,000 invested, you pay a $25 management fee.
The management fee, like I said, should be expected, as most charge it. If they don’t, you can guarantee they make their money elsewhere.
There may be other fees that surprise you, though.
2. ETF Expense Ratio
The ETF expense ratio fee is in addition to any management fee. This isn’t a fee you pay directly to the robo-advisor, so don’t think they are getting you from behind.
Instead, you pay the ETF expense ratio fee to the company managing the ETF. It’s not a huge fee, but again, every bit adds up. Going back to Betterment, they charge a 0.15% ETF Expense Ratio on top of the management fee. The 0.15% is only on the amount invested in ETFs, though.
Most robo-advisors have an ETF Expense Ratio fee that you’ll pay. When you shop around for the right robo-advisor, make sure you look not only at the management fee, but the ETF Expense Ratio too. Fortunately, most robo-advisors look for the lowest cost ETFs to include in their portfolios to save you money.
3. Trading fees
Some robo-advisors, but not Betterment or Wealthfront for example, charge trading fees. In other words, every time the robo-advisor buys or sells assets, you pay a trading fee.
Knowing these fees upfront is important to your bottom line.
If you’re already paying 0.25% for assets under management, for example, paying trading fees too will really eat away at your earnings.
For example, FutureAdvisor charges $7.95 to $24 per trade. That’s a sizeable chunk of your earnings and not a surprise fee you want to encounter.
4. Fees for add-on services
Watch out for other fees robo-advisors may charge. They call them add-on service fees and it’s a great way to make money off you.
Once they earn your trust with the free trades and low management costs, they try to lure you in for add-on services.
A few good examples include:
- Cash balance fees – Yes, some robo-advisors charge you to let your cash sit idle. Don’t let that happen to you.
- Advisor fees – If you prefer to talk to a human rather than a computer, you may pay a fee. This may not be a terrible thing, though, as human advice can be helpful. The cost of human advice with most robo advisors is tiny compared to what a traditional advisor would charge.
- Loans – Some robo-advisors offer loan services, which of course they charge for, as any bank does.
Any robo-advisor will charge for ‘other services.’ Before you sign on, find out what the service costs. Chances are you may be able to find identical services elsewhere. It may not be as convenient as having your account all in one place, but if it saves you money, I think it’s a good idea.
5. Account closing fees
Yes, you can even get charged for closing your account. Sounds crazy, right? Robo-advisors don’t want to lose your business, so they charge account closing fees to try to prevent you from leaving.
This mostly occurs with IRA accounts, but always read the fine print, as you never know what they will charge. You don’t want to find out the hard way that you owe money just for withdrawing your own funds!
Where to Find the Fees
So how do you know when a robo-advisor charges ‘other’ fees? You may have to dig a little. Some offer a pricing page right in their menu. It’s easy to look at and figure out what you’ll pay. If you can’t find the pricing fees easily advertised, do a little digging. Look in the robo-advisor’s FAQ section or read the fine print on their terms.
The reviews on this website do a great job of explaining all the hidden costs but always double-check with the advisory to make sure you are up to date.
It sounds crazy, but you’ll still save money using a robo-advisor versus a human advisor. Not only do human advisors charge a much higher percentage of assets under management, they don’t lump all fees into that amount. You get hit for every trade, ETF expense ratio, and miscellaneous fees, which greatly eat at your profits.
When you use a robo-advisor, you get great advice (can’t beat a computer) and automatic rebalancing. You’ll likely save on trading fees, as there’s not a whole of trading that goes on, or at least less than if you managed the account yourself.
Is there a fee I may have missed? Any experience you want to share? Just comment below!
Michael is a senior writer at The Robo Investor. He earned his master’s at the Craig Newmark School of Journalism at CUNY, and is currently taking CFP courses at the University of Scranton. He has been an avid finance enthusiast ever since he started investing at the age of 23. Meet the Team