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.
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).
The whole robo-advisory process is conducted online, from sign-up to portfolio construction to portfolio management. Here’s how it typically works:
One of the most common questions new investors have is how much money is required to open a robo-advisor account. The answer varies widely by platform:
Beyond the initial deposit, also check whether the platform requires a minimum monthly contribution to keep the account active or to access certain features. Some flat-fee platforms, like Acorns and Stash, can become disproportionately expensive at very low investment amounts — a $3/month fee on a $100 balance works out to a 36% annual cost.
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:
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Understanding what’s actually inside your portfolio can help you make a more informed choice. Most robo-advisors construct portfolios using a mix of low-cost ETFs spread across several asset classes, typically including:
The exact mix — your asset allocation — shifts based on your risk tolerance. A conservative portfolio might hold 70% bonds and 30% stocks. An aggressive portfolio might flip that ratio or go heavier into equities.
Rebalancing happens automatically. When market movements push your portfolio out of its target allocation — say stocks grow and end up representing a larger share than intended — the robo-advisor sells a portion and reinvests it elsewhere to restore the original balance. This keeps your risk level consistent without you having to do anything.
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.
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.
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.
A robo-advisor may not be the best choice if:
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.
A common concern for new investors is whether their money is protected if a robo-advisor goes out of business.
In the US, most robo-advisors are members of the Securities Investor Protection Corporation (SIPC), which protects customers up to $500,000 (including $250,000 for cash) if a brokerage firm fails. It’s important to note that SIPC protection covers the custody of your assets — it does not protect against investment losses due to market movements.
Many platforms offer additional coverage beyond SIPC limits through private insurers. Check each platform’s disclosures to confirm the level of protection offered.
Your funds are also typically held in your name at a separate custodian bank or brokerage, meaning they are segregated from the robo-advisor company’s own assets. This provides an additional layer of protection.
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.
The right robo-advisor depends on what you prioritize: low fees, tax efficiency, ESG values or access to human advisors. Use our comparison of the best robo-advisors to find the right fit for your situation.
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