If you want help managing your investments but don’t want to pay a financial advisor, a robo-advisor may be a good alternative. A robo-advisor is a digital platform that uses algorithms to automatically invest and rebalance your portfolio based on your answers to a few questions about your personal circumstances.
Robo-advisors offer affordable investing guidance — but you may be wary about putting investment decisions on autopilot. We’ll explain how robo-advisors invest your money, the pros and cons, and how they differ from human advisors. You’ll get the answers to your burning questions so you can decide whether a robo-advisor is right for you.
Watch: ‘You must invest to get rich’: ‘Your Rich BFF’ Vivian Tu says, ‘Just get a robo-advisor’
When you start using a robo-advisor, your first step is usually to answer a questionnaire. You’ll often be asked about how much risk you’re willing to take in pursuit of big returns (known as your risk tolerance), what your goals are, and how long you plan to keep your money invested. The robo-advisor will then use algorithms to design a recommended portfolio, typically consisting of mutual funds and/or exchange-traded funds (ETFs), based on your answers.
Most robo-advisors will periodically rebalance your portfolio, though the timing and triggers differ by platform. Often, they’ll rebalance if the portfolio strays by more than a certain amount from target allocations due to market conditions or if the investor’s financial situation changes. Many use age-based allocation to adjust the mix of stocks vs. bonds to gradually become more conservative over time, as well.
Learn more: What is a financial advisor, and what do they do?
Some robo-advisors also use a strategy called tax-loss harvesting, where they sell some investments at a loss to offset your capital gains, thereby reducing your tax bill.
Note that many brokerages that offer robo-advisory services also have a hybrid model that lets you combine the automated investing features of a robo-advisor with occasional access to a professional. However, hybrid services may cost more money or require a higher balance.
Not surprisingly, an automated investment platform is usually a cheaper option than working with a traditional financial advisor.
Typical robo-advisor fees start at around 0.25% of assets under management (AUM). In other words, if you invested $10,000 using a robo-advisor, you’d pay $25 in fees, while the other $9,975 would get invested. That’s significantly cheaper than the cost of a financial advisor, which typically ranges from 0.5% to 1.5% of assets managed. Alternatively, some robo-advisors may charge a flat monthly fee, often ranging from about $3 to $12.
Learn more: How much does a financial advisor cost?
Some robo-advisor services let you get started even if you don’t have much money to invest. For example, SoFi Invest and Stash require just $1 to use its automated investing service. But some robo-advisors have minimum up-front investments that can run from $500 to $5,000.
If you’re looking for a free robo-advisor, you can find some brokerages that don’t charge an advisory fee for digital investing advice, but these services have other ways of indirectly charging you.
For example, investment fees called expense ratios are usually baked into the ETFs and mutual funds in your recommended portfolio. They can also earn interest on your uninvested cash — and they may allocate more of your portfolio to cash than is typically recommended. Some robo-advisors will also upsell you premium packages that include sessions with a professional advisor or cross-sell other financial products, like mortgages or student loan refinancing.
Learn more: How to start investing: Your step-by-step guide
Let’s break down some of the key differences between a robo-advisor vs. a financial advisor:
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Robo-advisor: A robo-advisor’s services are primarily limited to designing an investment portfolio, monitoring market conditions and your investments’ performance, and rebalancing your portfolio as needed.
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Financial advisor: Financial advisors often provide a much broader scope of services. Depending on their expertise, they may offer guidance on preparing for a home purchase or a major life event (think getting married or the birth of a child), retirement withdrawal strategies, claiming Social Security, insurance needs, and estate planning.
Learn more: Alternatives to having a financial advisor: How to build wealth without one
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Robo-advisor: Though robo-advisors can customize a portfolio based on many different factors, there’s only so much personalization an algorithm can provide.
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Financial advisor: If you’re looking for a financial plan tailored to your specific goals and needs, a financial advisor is probably a better fit.
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Robo-advisor: Typical robo-advisor fees are significantly cheaper than the cost of a financial advisor. Many robo-advisor services charge a percentage of AUM that typically starts around 0.25% or less.
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Financial advisor: Financial advisor AUM fees often range from 0.5% to 1.5%.
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Robo-advisor: Though some robo-advisors have minimum investments of $500 or higher, others have no minimum upfront investment.
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Financial advisor: Many financial advisors require at least $50,000 to $100,000 in investible assets before they’ll work with you.
For that reason, robo-advisors are often far more accessible to beginning investors.
Pros:
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Fees are typically much lower than financial advisor fees.
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Minimum investments are lower than what a financial advisor usually requires.
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You’ll be able to build more diversification and risk management strategies into your investment than you could with a DIY portfolio.
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You can automate investment decisions.
Cons:
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You’ll have limited ability to customize your investments.
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A robo-advisor focuses on managing your investment portfolio, not holistic financial planning.
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There’s no human interaction (though some advisors provide access to professionals, often for a premium).
Many brokerages and fintech companies offer robo-advisors, yet each has different fee structures and investment requirements. Some popular robo-advisor options, along with their fees and minimums, are listed below:
Robo-advisor average annualized returns for a portfolio consisting of 60% stocks and 40% bonds generally ranged from about 7% to 9% for the five-year period ending June 30, 2024, according to Condor Capital’s “The Robo Report.” Your actual returns will vary significantly based on your asset allocation and market conditions. Keep in mind that investing returns are never guaranteed.
Using a robo-advisor may be a good idea if you’re not sure how to invest your money, particularly if you’re starting with a small amount. But as your assets grow, you may want to seek advice from a traditional advisor, even if it’s only on an occasional basis, since your finances tend to get more complex as you build wealth.
Two drawbacks of using a robo-advisor are that their services are typically limited to managing your investment portfolio and that, unlike a human advisor, algorithms can’t account for all the nuances of your personal situation and goals.
