A robo-advisor is an online service that uses your goals, money, time, and risk level to build and manage an investment portfolio.
You do not need to pick each investment on your own. You give the service some basic details, and it manages much of your portfolio for you.
Robo-advisors often use a mix of investments, such as exchange-traded funds (ETFs). They may also adjust your portfolio over time to keep it on track. They can make investing easier, but they do not remove market risk or replace all types of financial advice.
What Is a Robo-Advisor?
A robo-advisor is an online service that uses computer tools to help manage your money. When you open an account, it may ask about your goals, income, assets, time frame, and how much risk you can take. It uses your answers to build or suggest an investment plan.
The word “robo” may make it sound like a fully automatic service. But this is not always true. The level of human help can vary by company. Some firms use mainly automated tools, while others let you speak with a financial pro when you need help.
A robo-advisor is a service, not an investment. Your money is usually put into assets such as ETFs or other funds through an investment account. The service helps choose and divide your investments. It may also check your portfolio and rebalance it over time.
How Does a Robo-Advisor Work?
Robo-advisors may work in a few ways. But most follow the same basic steps.
1. You Share Some Basic Details
First, you fill out an online form. It may ask about:
- Your goals
- How long you plan to invest
- Your income
- Your assets
- How much risk you can take
- Your plans for retirement or other goals
This helps the service pick a plan that fits your needs. A person who plans to invest for many years may need a very different mix than someone who needs the money soon.
2. The Service Builds a Plan
The robo-advisor uses your answers to set an asset mix. This means it picks how much of your money may go into stocks, bonds, and cash.
For example, a person with a long time to invest and a high risk level may have more money in stocks. A person with less time or less risk may have more in bonds.
The mix will vary based on the service and the details you give.
3. Your Money Is Invested
Once you add money to the account, the robo-advisor puts it to work based on the plan. Many use ETFs or index funds. These funds can hold many assets at once.
This means you do not have to pick many stocks on your own. A fund may spread your money across many firms or parts of the market.
This can make investing easier if you do not want to pick each asset yourself.
4. The Portfolio Is Watched
The service keeps managing your money after it is invested. It may invest new deposits, keep the target mix, and make changes when needed.
This can help if you do not want to check your portfolio each day.
5. The Portfolio May Be Rebalanced
Market moves can change your asset mix.
For example, a portfolio may start with 70% stocks and 30% bonds. If stocks rise a lot, stocks may make up a larger part of the account.
Rebalancing can help bring the mix back near the target. A robo-advisor may do this for you based on its own rules.
6. You Update Your Details When Things Change
A robo-advisor cannot know when your life or plans change. You may need to update your account when your income, goals, time frame, or risk level changes.
A plan that fit you well in the past may not fit your needs later.
What Do Robo-Advisors Invest In?
Robo-advisors can use many types of assets. Each service may use a different mix and plan.
Common choices include:
- Stocks: Shares of firms. They can grow in value, but their prices can also fall.
- Bonds: Loans to firms or groups. They can pay income and may move in a way that differs from stocks.
- ETFs: Funds that hold many assets and trade on a stock market.
- Index funds: Funds that aim to track a set market index.
- Cash or cash-like assets: Money kept for easy use or as part of a lower-risk plan.
The goal is often to spread money across many assets. This is called diversification. It can limit the harm caused by one poor investment. But it cannot stop losses if the wider market falls.
How Much Does a Robo-Advisor Cost?
Robo-advisor fees can vary by firm and account. Some charge a fee based on the money they manage. Others may charge a set fee each month or year.
Do not look at just the main fee. The funds in your account may also have costs. Other fees may apply too.
For example, say a robo-advisor charges an annual fee of 0.25%. If you have $10,000 in the account, the fee would be about $25 for one year if the balance stays the same. This does not include other fees.
If you have $50,000, the same 0.25% fee would be about $125 per year under the same simple example.
| Cost to check | What it means |
|---|---|
| Advisory fee | The fee for managing your money |
| Fund expenses | Costs charged by the funds you own |
| Account minimum | The amount you need to start or use the service |
| Subscription fee | A set fee charged on a regular basis |
| Other account charges | Fees for transfers, withdrawals, or extra services |
A low advisory fee does not always mean a lower total cost. Compare all costs before you choose a robo-advisor.
What Are the Benefits of a Robo-Advisor?
Robo-advisors can make some parts of investing easier. They can do many tasks for you.
Automation
You do not need to pick each asset by hand. The service can set the mix, watch the account, and make some changes for you.
Diversification
Many robo-advisors use funds that hold many stocks, bonds, or other assets. This can make it easier to spread your money across many investments.
Automatic Rebalancing
Your asset mix can change as markets move. A robo-advisor can check the mix and rebalance it based on its rules.
Lower Cost for Portfolio Management
Many robo-advisors aim to offer money management at a lower cost than some old-style advisory services. Some also have low or no account minimums.
Fewer Daily Choices
Some people do not want to decide what to buy or when to rebalance. A robo-advisor can handle many of these routine tasks. This may make investing feel less complex.
What Are the Drawbacks of a Robo-Advisor?
Robo-advisors can help with many tasks, but they also have limits.
Less Personal Advice
A basic robo-advisor may not give the same level of personal help as a financial pro. A pro can look at your wider money needs and goals.
Fewer Investment Choices
A robo-advisor often uses its own set of investment rules. If you want to pick single stocks, certain bonds, or build a custom plan, a self-run brokerage account may give you more choice.
You Can Still Lose Money
A robo-advisor cannot promise a gain. Your account can lose value when the investments in it fall.
Complex Money Needs May Need More Help
Some needs are too complex for a basic robo-advisor. These may include tax work, estate plans, business money, or a large holding in one asset. In such cases, you may need help from a financial pro.
You Still Have a Role
You need to give the service true and up-to-date details. You should also know how your plan works. If your goals or money needs change, update your account.
Are Robo-Advisors Safe?
The word safe can mean many things in investing. It helps to look at three areas: market risk, account protection, and online security.
Investment Risk
A robo-advisor cannot make investing risk-free. Stocks, bonds, funds, and other assets can lose value. No real investment service can promise that your money will always grow.
Brokerage Protection
For a U.S. investment account, SIPC protection may apply if a covered brokerage firm fails and customer assets are missing. SIPC may protect up to $500,000, including up to $250,000 for cash, subject to its rules and limits.
SIPC does not cover normal market losses. For example, if an ETF drops in value because the market falls, SIPC will not pay you for that loss.
FDIC Insurance Is Different
Stocks, bonds, and mutual funds are not FDIC-insured just because a bank offers them. FDIC insurance is for certain bank deposit accounts. It does not cover normal losses on investments.
The protection you get can depend on how the robo-advisor works and which firm holds your assets. Before you open an account, read the firm’s disclosures. Also check the firm that holds your money and securities.
For U.S. firms, you can use the SEC’s Investment Adviser Public Disclosure system to check an adviser’s registration, license details, and public disciplinary record.
Robo-Advisor vs Financial Advisor
A robo-advisor and a human financial advisor can both help you invest. But they work in different ways.
| Factor | Robo-advisor | Human financial advisor |
|---|---|---|
| Portfolio management | Mostly done by a computer system | Done or guided by a person |
| Investment choice | Uses a set plan | May build a plan for you |
| Human help | Limited or may vary | Usually a key part of the service |
| Cost | Often lower for basic services | Often costs more |
| Choice | Usually less flexible | Can offer more choice |
| Complex plans | Often limited | Better for complex needs |
| Daily management | Mostly automatic | Done by the advisor or team |
There is also a hybrid service. It uses a robo-advisor for many tasks but also gives you access to a financial pro. This can be useful if you want both automation and human help. The extra cost may or may not be worth it for you.
Robo-Advisor vs Self-Directed Investing
The main difference is who makes the investment choices.
| Type | Who picks the investments? | Who manages them? |
|---|---|---|
| Robo-advisor | The service | Mostly automatic |
| Self-directed account | You | You |
| Human advisor | The advisor | The advisor or team |
| Hybrid service | System and human | Shared |
A self-directed account gives you more control. But you also have more work. You must choose what to buy, spread your money across investments, rebalance the account, and update your plan as your goals change.
A robo-advisor may suit you if you want simple and automatic portfolio management instead of choosing each investment yourself.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is a way to use an investment loss for tax purposes. It may involve selling an investment that has lost value and buying a different one. Tax rules and other factors apply.
The aim is to use the loss in a way that may lower your tax bill while keeping your money invested. It does not turn a loss into a gain.
This tool is mainly used in taxable investment accounts. Not all robo-advisors offer it. Those that do may use different rules.
U.S. investors also need to know about wash-sale rules. In general, the IRS may not allow a loss for tax use if you buy the same or a very similar stock or security within 30 days before or after the sale. Other rules and limits can apply.
Tax rules can be hard to follow. An automatic tax tool does not mean that every trade or plan will be tax-efficient for you.
Who Is a Robo-Advisor Best For?
A robo-advisor may be a good fit if you:
- Want an easy, hands-off way to invest
- Have simple or clear investment goals
- Want most portfolio tasks done for you
- Want to spread your money across many investments
- Are fine with a set range of investment choices
- Do not want to manage your account each day
A robo-advisor may not be the best fit if you:
- Want to trade single stocks or other assets yourself
- Need a detailed financial plan made for you
- Have complex tax or estate needs
- Want in-depth money coaching
- Need help with many parts of your finances
For example, a person saving for a long-term goal may like a robo-advisor if they want a broad portfolio managed for them. But a person dealing with a business sale, an estate, a large stock holding, and complex tax needs may need more personal help from a financial pro.
How to Choose a Robo-Advisor
Do not pick a robo-advisor based only on its main fee. Look at the full service before you choose.
Check these points:
- Advisory fees: Know what you pay to have your money managed.
- Fund costs: Check the fees charged by the funds in your account.
- Account minimum: See how much money you need to start.
- Account types: Make sure the service has the type of account you need.
- Investment choices: Check the funds, asset types, and plans you can use.
- Rebalancing: Learn how and when the service changes your asset mix.
- Tax tools: See if it offers tax-loss harvesting or other tax tools. Check the rules for each tool.
- Human help: Find out if you can talk to a financial pro.
- Regulatory details: For U.S. firms, check their registration and public records.
- Withdrawals and transfers: Learn how you can move or take out your money. Check for fees or limits.
Read the firm’s latest disclosures before you open an account. Fees, features, rules, and who can use the service may change over time.
How to Get Started With a Robo-Advisor
If an automated plan fits your needs, getting started is often simple.
1. Set Your Goal
Know why you want to invest. Also know when you may need the money.
2. Compare Services
Compare fees, investment choices, account types, human help, and any account protections that may apply.
3. Open the Right Account
You may be able to open a taxable account or a retirement account. The choices depend on the service.
4. Fill Out the Investor Form
Give clear and true details about your money, goals, time frame, and risk level.
5. Review the Plan
Look at the main asset mix and the types of investments used. Make sure you understand the plan before you add a large amount of money.
6. Add Money
Move money to the account by following the firm’s steps.
7. Keep Your Details Up to Date
Update your goals and money details when things change. The service can only manage your account based on the details and rules it has.
Common Questions About Robo-Advisors
Can You Lose Money With a Robo-Advisor?
Yes. A robo-advisor cannot remove market risk. Your account can lose value when the assets in it fall.
How Much Money Do You Need to Use a Robo-Advisor?
There is no set amount for all robo-advisors. Each firm can set its own rules. Some let you start with a small amount. Others may need a larger balance for some services.
Can You Withdraw Money From a Robo-Advisor?
In most cases, you can take money out of an investment account. But the time, tax rules, and fees can vary. The rules also depend on the type of account. Retirement accounts may have extra rules and limits.
Does a Robo-Advisor Guarantee Returns?
No. A robo-advisor cannot promise a return. Your gain or loss depends on the assets in your portfolio and how they perform.
A Simple Way to Think About Robo-Advisors
A robo-advisor is an online service that helps manage your investments. It uses your goals, time frame, and risk level to build a plan. It can also handle tasks such as investing, spreading your money across assets, and rebalancing.
This can be a good choice if you want a simple, hands-off way to invest. But it does not remove market risk. It also may not give the same level of personal help as a human financial advisor.
Before you choose a service, compare its fees, fund costs, account types, investment plan, human help, and account protection. Pick a service that fits your goals, needs, and level of control.
