Do Robo Advisors Beat The Market? Fund Performance Uncovered

The BIG Question Is Do Robo Advisors Beat The Market? The Answer May Surprise You Because Most Funds Do Not Even Try To Outperform The S&P500.

Do Robo Advisors Beat The Market?

The short answer is that most Robo Advisors fail to beat the market.  The goal of most Robo Advisors is not actually to beat the market but to automatically invest your money based on your requirements and risk tolerance.  If you have a low tolerance for risk, your portfolio will be more heavily weighted in favor of bonds which would inhibit the ability to beat the market.

However, in all of our time spent reviewing Robo Advisers, one company does claim to beat the market and it is the only one that offers a pure stock portfolio.  The Emperor Invests fund has published a whitepaper about its methodology and is one of the few funds to claim and show a chart that clear beats the market over time.

[Related Article: The Emperor Invests Robo Advisor Review]

How Can You Judge Robo Advisor Performance?
How Can You Judge Robo Advisor Performance?

What Is Beating The Market?

In the USA the most common definition of beating the market is that any given fund should be able to perform better than the S&P500 Index.  Depending on the date range selected the S&P 500 Index of the 500 largest companies by market capitalization returns between 7.5% and 10%.

How does Wall Street really make Money?

Wall Street Investment banks make money from:

  • Initial Public Offerings – helping companies get access to capital markets
  • Mergers, Acquisitions & Spin-Offs – helping companies buy other companies, merge with other companies or even splitting up large companies
  • Fund Management – Administering Funds such as Exchange Traded Funds (ETF’s) or Mutual Funds
  • Derivative Investments – establishing innovative ways to enable high net worth (HNW) individuals or money managers to invest in exotic financial instruments – see Financial Crisis

Contrary to popular belief Wall Street Investment Banks, Financial Advisors & Brokerage Houses do not make their profits from having super talented money managers that beat the stock market returns.  In fact, most fund managers cannot beat the market.

92% of Fund Managers Do Not Beat The Market Video

92% of Fund Managers Cannot Beat The Market

Watch The Video Overview

Investment Banks and Brokers actually make money by:

  • By taking a slice of your total investment with them – e.g. Management Charges, whether or not they make you a profit
  • Charging you per Stock Trade – e.g. a trading commission

Robo Advisor Performance Metrics

Evaluating Robo Advisor performance is difficult because there are vast differences between advisors. For instance, different advisors keep different levels of the customer’s money in cash.

Notably, Charles Schwab’s Intelligent Portfolios keep 6% of a customer’s investment in cash. To explain, a high level of cash lowers the exposure to market losses. Unfortunately, a high percentage of cash increases the exposure to inflation and lowers potential market gains.

On the other hand, most Robo Advisors keep less of a client’s money as cash. In addition, some Robo Advisors could allow you to choose the level of funds in cash.

For instance, cash is a poor investment for a younger person saving for retirement or an individual with a high income. However, cash is a good investment for a person with a limited income such as a retiree.

Understanding Robo Advisor Performance

To explain, a person with a limited income is more likely to use his or her investment as an emergency fund. Hence, that person could lose money from buying and selling costs by trying to access extra cash.

Uniquely the speed at which a Robo Advisor follows the market can help you make more money. For instance, a Robo Advisor can quickly sell stocks or funds ahead of a loss or buy right after a drop in price. In fact, Robo Advisor will instantly react to market trends.

The advantage of a quick reaction is that losses can be prevented. The disadvantage is that Robo Advisors’ decisions could be based on short term trends. For example, a Robo Advisor could sell a stock when a price drop is temporary.

Finally, Robo Advisors can implement complex and hard-to-understand strategies like tax-loss harvesting. In fact, Robo Advisors can allow average people to take advantage of complex investment strategies formerly reserved for hedge funds or investment bankers.

Unfortunately, such complex strategies can be hard to understand and evaluate. In particular, it can take several years or longer to see the gains from complex investment strategies. For example, it can take several years to determine if you are making money from a tax loss strategy.

Evaluating Robo Advisor Performance

The easiest way to evaluate Robo Advisor performance is to compare advisors’ one or two-year rates of return with the fees.

Determining an advisor’s rate of return is easy. You can figure out the actual rate of return by subtracting the fees the advisor charges from the advertised rate of return.

If you want to compare Robo Advisors, the best method is to compare their rate of growth to the popular stock market indexes like the S&P (Standard & Poors) 500 or the Dow Jones. However, such comparisons only work with specific funds or portfolios. Hence it is often impossible to tell when comparing the performance of a platform to that of the S&P 500.

Generally, a good rule of thumb is that a portfolio should be proven to beat the S&P or Dow Jones, the best Robo Advisors portfolio’s rate of gain should significantly exceed the S&P by at least 5% per year.

However, rates will vary from year to year and outside factors like inflation and taxation can eat up your returns. Notably, some high-income people could lose money if they earn a high rate of return without implementing a tax-loss strategy.

Thus, you will need to do research when you go looking for a robo advisor. To complicate matters, the technology is new and changing all the time.

Performance can change quickly because some firms will constantly add new features and capabilities to Robo Advisors. Hence, you should visit your advisors’ website regularly and check out the new features.

Robo Advisor Fund Performance

As previously stated many Robo Advisor funds are not completely transparent with their reporting of their fund’s performance, due to possible to the complexity of options on offer not being directly comparable to the underlying index or more likely because they do not beat the market and do not want to make false claims.

Here is a listing of our reviewed Robo Advisors and their self-stated performance, so you can make your own mind up.

Emeperor Investing Robo AdvisorEmperor Investments – Fund Performance

Essentially combining technical and fundamental analysis allows Emperor to beat the underlying market, in this case, the S&P 500, by almost 9% per year.  The one caveat is, that the model has been forward tested over the last 11 years, so these results are theoretical, but the belief is that Emperor will continue to beat the market moving forward.  Only time will tell, but now the fund is live and the real world returns will be released soon for the 6 months from July 2018.

Of the 10 Main Robo Advisory Services, Emperor Claims the Best Market-Beating Performance

Liberated Stock Trader Review WinnerEmperor charges 0.6% per year on assets under management, this is low compared to mutual funds, but higher than the average costs of competing Robo Advisory services.  An important point here is although the average annual fees for Robo Advisors are between 0.25% and 0.35% per year, if Emperor delivers the expected real-world return of significantly beating the underlying index by 5% to 9%, the 0.6% fee they charge will be a small change, in fact, a bargain compared to the longer-term compounded gains you will receive.  In addition to this, there are no hidden fees with Emperor, many competitors will charge additional fees for the ETF’s or Mutual Funds they invest in on your behalf, not so with Emperor, it is simply a 0.6% flat fee.

Finally, to round off the service, Emperor harvests all dividends for you and automatically reinvests them.

Get a 6 Month Commission Free TrialRead The Full Emperor Review

M1 Finance Fund PerformanceM1 Finance Robo Advisor

M1 provides so many different expert portfolios to choose from and depending on when you open an account and choose to invest, the returns on your investment can vary.  Suffice to say, M1 claims that on average their expert portfolios (pies) are within 2% or slightly above the underlying market return.

Liberated Stock Trader Review RecommendedM1 Finance is the only Robo Advisory service in our review that offers commission-free trading for their customers.  This means your account will have no management fee whatsoever.  This is very positive for the service, but the question is, how do they make money?  They essentially make money from short-term lending of any available cash funds to the overnight inter-bank market, if you utilize their borrowing facility or if you invest in an M1 Plus account.  Finally, they will receive some small rebates from liquidity providers for their order flow.  This is all quite normal and used throughout the industry.

Another great bonus of this mature service from M1 is that tax-loss harvesting is automatically integrated into the account.  This means that when you choose to withdraw funds from your account, the algorithms will consider which securities to sell giving priority to those that are incurring losses, so they can offset future gains, clever.

On top of this, M1 promotes the purchase of fractional shares as a unique selling point, this means that if the portfolio you are invested in dictates a purchase of a share with a high price, you can still be fully invested with a purchase of a fraction of the share.

Visit M1 Finance

Betterment Robo Advisory


Betterment Fund Performance

Betterment’s proven past returns according to its literature equates to a 5% higher return than the average US investor attains per year.  This if course varies depending on your percentage of stocks versus bonds allocation you select in your account.  One contributor to this solid return is the highly efficient approach to tax-loss harvesting.

Betterment is currently the third-largest Robo Advisory service in the USA with over $13.5 billion dollars in assets under management.

Visit Betterment

Wealthfront Investing Performance wealthfront-robo-advisor

Wealthfront, to their credit, do not claim to be able to beat the market, instead, they are a safe and effective pair of hands to trust your money with.  So, do not expect outsize fund performance, expect performance in line or slightly under the S&P 500. Many people have bought into this ethos as Wealthfront clients entrust them with over $20 billion dollars of their money, making them the fourth-biggest Robo Advisory Service in the USA.

However, they were charged by the SEC for claiming to perform effective tax-loss harvesting for clients but failed to do so.

Visit Wealthfront

Ellevest Robo Advisor PerformanceEllevest Automated Investing

Ellevest does not promise to deliver performance better than the benchmark indices, instead, it counters that notion by suggesting that it is reaching your financial and personal goals that are more important than great performance.  The typical Ellevest portfolio will include US stocks, international stocks, currencies, bonds and real estate, some of which includes socially responsible impact funds.

Visit Ellevest

Morgan Stanley Access Investing Robo Service Performance Morgan Stanley Automated Investing

Again as with many of the robo advisor services, there are no claims about returning market-beating percentages to customers, instead, the service is focused on enabling an automated and balanced portfolio recommendation.  So do not expect to beat the market.  One thing I like a lot is that they offer you the flexibility to also select topics that you feel passionate about and they will skew your portfolio in favor of companies in line with your values or beliefs.  For example, if you prefer your investments to tilt in favor of companies or funds that promote gender diversity, climate action or even robotics & artificial intelligence the Morgan Stanley Access Service will have you covered.

Visit Advisor

TD Ameritrade Investment Results TD Ameritrade Robo Advisor

Like many of the other Robo Advisor services, TDA will recommend a selection of exchange-traded funds (ETF’s) based on modern portfolio theory, which seeks to minimize risk and optimize reward.  The ETF selection is essentially based on the research performed by Morningstar analysts.

It is nice to see that tax-loss harvesting and automatic portfolio balancing is included and available for all accounts.  Finally as a socially responsible and environmentally aware person myself, I am glad to see that TDA offer a selection of five socially aware portfolio options so you can invest in alignment with your beliefs.

Visit TDA


Vanguard Investing Methodology & Performance 

As Vanguard is one of the largest providers of ETF’s and Mutual Funds, it, of course, selects its own funds to be part of your suggested portfolio.  This earns them fund management fees in addition to the 0.6% AUM fee for your account.  Vanguard does not claim to provide outsized returns it is really more focused on a higher level of customer service and the personalization of your portfolio based on your life goals.  Do not expect stellar profits, but do expect good customer service.

Visit Vanguard


Schwab Investing Methodology & Performance 

Schwab makes no claims to portfolio performance, so you can expect performance to be lower than industry benchmarks like the S&P 500.  Typically a Schwab portfolio will consist of US stock ETF’s, international stock ETF’s. emerging market stock ETF’s, and Bonds.

Visit Schwab

In Summary: Do Robo Advisors Beat The Market?

Robo Advisors should beat the market, otherwise what is the point.  Out of the 10 Robo Advisors we investigated in our research only 5 offered any historic performance details.

In fact, only Emperor Investments, Wealthfront, and M1 Finance offered any detailed reporting of performance.

Only one of the funds Emperor Invests claim to have significantly beat the S&P 500 over the longer term. M1 Finance claims that its funds are typically within 2% of the underlying index.


Learn More About Robo Advisors With Our 12 Part Q&A Series

1★ What is a Robo Advisor & How Do They Work?7★ Are Robo Advisors A Good Idea? 8 Advantages Uncovered
2★ Hybrid vs AI vs Robo Advisors8★ Are Robo Advisors Worth It? What Are The Alternatives?
3★ How Do Robo Advisors Really Work? In 7 Steps9★ Do Robo Advisors Beat The Market? Fund Performance Uncovered ✔ You Are Here
4★ A Hybrid Robo Advisor- What Is It & How Do They Work?10★ Are Robo Advisors Safe? Security of Assets Examined – Next Article
5★ Robo Advisors vs Human Advisors11★ Top 10 Best Robo Advisors [160 Point Review & Comparison]
6★ Top 20 Best Robo Advisor Returns & Fees Comparison12★ Review Winner Emperor Investments – Robo Advisor Review [In Depth]


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