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What is a robo-advisor and how does it work?

As automated investment advisory services, robo-advisors are ideal for beginners and hands-off investors.

We already rely on robots and automated services when it comes to picking and delivering our shopping or online banking. The robots are now also taking over the investment world. Rather than images of the Terminator bursting into fund manager offices warning them to “invest with me if you want to live,” robo-advisors provide a low-cost and flexible alternative to traditional financial advice.

What is a robo-advisor?

A robo-advisor is an algorithm-driven investment advisory service that automates portfolio construction, monitoring and rebalancing, all with little-to-no human interaction. Like a human financial advisor, who will construct a portfolio on your behalf based on your investing goals and risk tolerance, a robo-advisor will construct a portfolio on your behalf based on your answers to a short questionnaire that gathers similar metrics: your financial goals, time frame and risk tolerance.

Automating this process and constructing portfolios of low-cost exchange-traded funds (ETFs) helps keep costs low. Whereas a human financial advisor may charge an advisory fee of around 1% of your total assets under management, most robo-advisors typically charge an advisory fee of 0.25%. Some brokers, like SoFi Invest and Titan, offer robo-advisory services at no additional cost.

Robo-advisors may be available through taxable brokerage accounts or individual retirement accounts (IRAs).

Our top picks for robo-advisors

Automated direct indexing

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  • Low-cost direct indexing and self-directed trading
  • Automatic portfolio rebalancing and dividend reinvestment
  • Earn up to 5.00% with a Frec Treasury account

Best overall robo-advisor

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  • Automated stock and bond portfolios
  • Trade individual stocks with $0 commissions
  • Earn 5% APY with a high-yield cash account

Best for micro-investing

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  • Automated and custom portfolio options
  • Invest spare change automatically
  • Earn a $20 bonus when you set up an account and make your first recurring investment (min. $5)

How does a robo-advisor work?

The whole robo-advisory process is conducted online, from sign-up to portfolio construction to portfolio management. Here’s how it typically works:

  1. Sign up for an account. Provide personal information such as your name, Social Security number, email and password, just as you would when signing up for a regular brokerage account.
  2. Complete a short questionnaire. Answer questions about your investing goals, time frame and risk tolerance.
  3. Confirm your suggested portfolio. The robo-advisor will recommend a portfolio, typically of ETFs, based on your responses from the questionnaire. Review your options and choose a portfolio.
  4. Fund your account. Connect a bank account or transfer assets from another broker to fund your new robo-advisor account.
  5. Periodically monitor your account. The robo-advisor will provide general portfolio management like rebalancing, but you should check in on your account every so often to ensure your investments still align with your goals and risk tolerance.
  6. How should I choose a robo-advisor?

    The first step when choosing a robo-advisor is to ensure it is regulated. In the US, robo-advisors should be SEC-registered investment advisors.

    From here, consider the following:

  • Cost. Most robo-advisors charge an advisory fee of around 0.25%, while others like Acorns, charge a flat monthly fee. If you’re looking to invest a very small amount, such as $50 per month, flat-fee platforms can turn out to be more expensive. Also consider miscellaneous fees like account transfer fees or paper trade confirmation fees.
  • Past performance. Check how well a platform’s portfolios have performed. Most will let you see the track record of their risk rated funds over time periods such as 1, 5 or 10 years. Remember, past performance isn’t necessarily an indication of how a portfolio will fare in the future but it can give you an indication of what to expect.
  • Features. Robo-advisors will let you monitor the performance of your portfolio online. But some may offer extras such as an app or tools to forecast how much your pot could be worth in the future based on your current level of investment.
  • Customer feedback. Check customer reviews and see if others have a generally positive experience with the robo-advisor.
  • Investment options. Does the robo-advisor only offer ETFs, or does it let you invest in individual stocks or mutual funds too?
  • Account types. Is the robo-advisor only available through a taxable brokerage account or can you automate your retirement savings?

How does a robo-advisor make money?

There is usually no charge to open an account with a robo-advisor, but most will charge advisory fees once you start investing. You will usually need a minimum amount to start an account and there may be a certain amount you have to contribute each month.

Common robo-advisor features

  • Risk questionnaires. You will need to answer a series of questions that assess your risk appetite and how comfortable you are with different styles of investing and levels of loss.
  • Model portfolios. Robo-advisors offer portfolios of tracker funds or exchange-traded funds that give you exposure to different markets. They are weighted based on different risk levels with the most cautious following developed markets and the more risky putting money into emerging market economies.
  • Email updates. Rather than regular meetings with a financial advisor, robo-advisors will offer blogs, email updates and videos. These will often explain the performance of the portfolios and any changes in strategy or outlook.
  • Website and app features. You will be able to log in to your account and track your portfolio’s progress through an app or website. You can also make withdrawals and increase or decrease your investment online from your smartphone or computer and use graphs and tools to forecast what your portfolio could be worth in the future.

What is a ready made portfolio?

Rather than investors choosing their own funds, a ready made portfolio is prepared for them. Thus combines a range of investments, which are mainly passive funds in the case of robo-advisors.

The type of funds will depend on the risk rating of the ready made portfolio. Riskier portfolios will hold assets that can have the potential for higher returns such as emerging or alternative markets but also for steep losses.

All the monitoring and rebalancing is managed for you so you just have to decide how much risk you are willing to take and how much money you want to invest.

Do you need a robo-advisor or financial advisor?

A robo-advisor or financial advisor may be worth it if you want to take the hassle out of researching and monitoring an investment portfolio. The robo-advisor will construct, monitor and rebalance your portfolio automatically and for a lower cost.

On the other hand, a human financial advisor can help with wider financial planning issues beyond just investment selection and monitoring and can ensure you are investing the correct amount in the most appropriate way. An advisor can also be at the end of the phone if you have worries about your portfolio, which isn’t possible with all robo-advisors. Using a human financial advisor can also be beneficial if you have more complex financial planning needs such as inheritance tax planning or you are working out how and when to access your pension.

Some robo-advisors may also provide financial advice and a review of your financial goals and portfolio for an extra fee.

Can you trust robo-advisors?

Yes, you can typically trust robo-advisors. Like human financial advisors, robo-advisors must be SEC-regulated and many employ various safety measures to ensure customer information and money is safe and secure.

Pros and cons of robo-advisors


  • Set up an account in minutes
  • Low cost investment
  • Monitor performance online
  • Ready made portfolios are set up and managed for you


  • May not be suitable for complex financial planning needs
  • No guarantee that your responses reflect what is the most suitable product for you
  • Little control over where your money is invested
  • Need to be tech savvy

Bottom line

A robo-advisor provides an effective middle ground between those who aren’t confident about managing their own investments and don’t want to or don’t have enough money to use a financial advisor.

Everything is set up and managed for you online within minutes based on your responses to a risk questionnaire.

This approach can be faster than using a financial advisor and you get access to snazzy websites and apps.

But it isn’t an overall financial planning experience that a human advisor can provide, which may be more beneficial for those with more complex needs.

Frequently asked questions

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