Robo-advisors offer a variety of pricing models, generally falling into these categories:

1. Assets Under Management (AUM) Fee:

• How it works: This is the most common pricing model. You pay a percentage of the total value of your investments managed by the robo-advisor.


• Pros:


• Transparent and straightforward. You know exactly what you're paying based on your portfolio size.


• Incentivizes the robo-advisor to grow your portfolio, as their fee increases proportionally.


• Cons:


• Can be more expensive than other models, especially for larger portfolios.


• You pay the fee regardless of the portfolio's performance (although poor performance will shrink your portfolio, thus lowering the fee).


• Typical Range: 0.20% to 0.50% per year. Some may offer lower rates for very large balances.


• Examples: Betterment, Wealthfront, Schwab Intelligent Portfolios (though Schwab's basic service is 0%, it might charge more for premium services).

• How it works: You pay a fixed dollar amount, usually monthly or annually, regardless of your portfolio size.


• Pros:


• Predictable costs.


• Potentially cheaper than AUM for larger portfolios.


• Good for those with simpler financial situations or who are mainly seeking basic investment management.


• Cons:


• Might be more expensive for smaller portfolios.


• May not be suitable if your financial situation is complex and requires more personalized advice.


• Examples: Some robo-advisors use this structure for specific tiers of service or for financial planning packages. Harder to find pure robo-advisors using only flat fees.

• How it works: Similar to a flat fee, but often involves a wider range of services. You pay a monthly or annual subscription fee for access to financial planning tools, advice from human advisors, and/or a more customized investment experience.


• Pros:


• Potentially cost-effective if you utilize the extra services offered.


• Can provide access to human advisors without the higher cost of traditional financial advisors.


• Cons:


• If you don't need the extra services, you're overpaying.


• The quality of the human advice can vary greatly.


• Examples: Ellevest offers different membership tiers with varying subscription fees. Some platforms offer basic robo-advisory services, with an option to subscribe to premium services including access to financial planners.

• How it works: The robo-advisor earns a commission on each trade or investment transaction. This model is becoming less common for robo-advisors.


• Pros:


• Can be cheaper if you have very few transactions.


• Cons:


• Potential for conflicts of interest, as the robo-advisor might be incentivized to make more trades than necessary.


• Difficult to predict the total cost.


• Rarity: Increasingly rare among pure robo-advisors. More common in traditional brokerage accounts where you're actively managing your own investments.

• How it works: Combine elements of different pricing models. For example, an AUM fee plus additional fees for financial planning services or access to human advisors.


• Pros:


• Can be tailored to specific needs.


• Provides flexibility.


• Cons:


• Can be more complex to understand. Requires careful evaluation of the different fees involved.


• Examples: Many robo-advisors are evolving to offer hybrid models to cater to a broader range of clients, offering a basic AUM-based service along with optional paid features such as human financial planning advice or tax optimization strategies.

• How it works: Some robo-advisors offer a basic service with no AUM fee. They may generate revenue through other means, such as:


• Cash Drag: Earning interest on uninvested cash held in your account.


• Payment for Order Flow: Receiving payments from market makers for directing order flow to them.


• Up-selling Premium Services: Offering paid upgrades for features like financial planning or tax-loss harvesting.


• Referral Fees: Earning commissions for referring clients to other financial products (e.g., insurance, mortgages).


• Pros:


• No direct fees.


• Good for beginners with small amounts to invest.


• Cons:


• May have limited features.


• Might not be truly "free" if the revenue generation methods lead to suboptimal investment decisions (e.g., higher cash balances than necessary).


• It's important to understand how the platform is making money.


• Examples: Schwab Intelligent Portfolios (basic service). Keep in mind that while the headline fee is 0%, you may still be indirectly paying through cash drag or other revenue streams.

• Portfolio Size: AUM fees can be more cost-effective for smaller portfolios, while flat fees may be better for larger portfolios.


• Services Offered: What services are included in the fee? Do you need access to human advisors, financial planning tools, or tax optimization?


• Transparency: How clear and easy to understand is the fee structure?


• Hidden Fees: Are there any other fees you should be aware of, such as transaction fees, account transfer fees, or inactivity fees?


• Cash Drag: Does the robo-advisor hold a significant portion of your portfolio in cash? This can reduce your returns. Understand why they are doing it.


• Investment Strategy: Is the investment strategy appropriate for your risk tolerance and financial goals? A low fee is useless if your investments don't perform well.


• Overall Value: Consider the total value you're receiving for the fees you're paying. A slightly higher fee may be worth it if you're getting better service or better returns.

• Determine your needs: What are your financial goals? How much advice and support do you need?


• Compare pricing models: Consider different robo-advisors and their pricing models based on your portfolio size and needs.


• Read the fine print: Understand all the fees involved, including any hidden fees.


• Consider the value: Don't just focus on the lowest fee. Think about the overall value you're getting for your money.