What Is a Robo-Advisor and How Does It Work?

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

Best overall robo-advisor

Wealthfront

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T&Cs apply

$50 bonus

• Automated stock and bond portfolios
• Trade individual stocks with $0 commissions
• Earn 3.30% APY with a high-yield cash account

No-advisory-fee automated investing

Titan

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T&Cs apply

$150 bonus

• Automated stock and bond ETF portfolios
• No advisory fee for automated portfolios
• Earn a 4.23% yield with a high-yield Treasury account

No-advisory-fee robo-advisor

SoFi Robo Advisor

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Alternate asset access

• 0.25% annual advisory fee
• Access to financial planners

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.

How much do you need to start?

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:

• $0 minimum: SoFi Invest, Betterment, Titan
• $50 minimum: Robinhood Strategies
• $500 minimum: Wealthfront
• $5,000 minimum: Schwab Intelligent Portfolios
• $100,000 minimum: Betterment Premium (for access to human advisors)

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.

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?
• Tax-loss harvesting. Does the platform automatically sell losing positions to offset gains elsewhere in your portfolio? Tax-loss harvesting can meaningfully improve after-tax returns and is offered by platforms like Wealthfront and Betterment but not all robo-advisors.
• ESG options. If sustainable or socially responsible investing matters to you, check whether the platform offers ESG (Environmental, Social and Governance) portfolio options.

What does a robo-advisor actually invest in?

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:

• US stocks (large-cap, small-cap)
• International stocks (developed and emerging markets)
• Bonds (government and corporate)
• Real estate investment trusts (REITs)
• Cash or money market funds

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.

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.
• Tax-loss harvesting. Some robo-advisors automatically sell underperforming assets to offset taxable gains elsewhere in your portfolio, potentially improving your after-tax returns. This is typically available on taxable accounts only.
• ESG portfolios. Several platforms now offer portfolios screened for environmental, social and governance criteria, allowing you to align your investments with your values without sacrificing diversification.

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.

When you should skip a robo-advisor

A robo-advisor may not be the best choice if:

• You have a portfolio above $500,000 and need estate planning, tax strategy or retirement income planning
• You’ve recently experienced a major life event — divorce, inheritance or a business sale — that requires holistic financial guidance
• You want to actively pick individual stocks or make tactical market calls
• You’re uncomfortable with a fully digital experience and prefer human accountability

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.

Is my money safe with a robo-advisor?

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.

Pros and cons of robo-advisors

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.

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.

Frequently asked questions

• Are robo-advisors regulated?

  Robo-advisors have to be approved and regulated by the Financial Conduct Authority (FCA).

  This means, like banks, investment firms and other financial advisors have to follow rules on treating customers fairly, keeping client money safe and running a prudent business.

• Which robo-advisor has the best returns?

  Returns vary across providers. Most will have a statistics page where you can track the performance of the various portfolios on offer from a robo-advisor. You can usually see how portfolios have performed over 1 or 5 years or even by individual time periods.

  It can be hard to compare providers directly against each other as their risk rated portfolios may have different assets but it is useful to contrast how they all perform in different markets to spot the best robo-advisors.

  Past performance isn't a guarantee of future returns but it does give you a sense of what could happen with your money.

• Is a robo-advisor better than an index fund?

  An index fund follows the performance of an index such as the FTSE 100 or S&P 500. It is made up of companies in the index it is tracking and will closely replicate their performance. This means if an index goes up, so will the tracker fund. But it also works the other way and a dip in an index will also be reflected in the performance of a tracker.

  In contrast, a robo-advisor builds a diversified portfolio of different ETFs, some of which may be index funds, based on an individual's attitude and appetite for risk.

• Is using a robo-advisor the same as financial advice?

  Robo-advisors are still regulated in the UK but they provide a different type of support than financial advisors.

  They offer a simplified form of advice geared towards recommending funds based on your response to a risk questionnaire. That is different to a financial advisor, which is regulated and qualified to advise on a range of issues and may be able to recommend a wider range of products.

• Is all robo advice automated?

  The robo element of robo advice refers to the algorithms behind the risk questionnaires and the technology that helps users contribute to and monitor their portfolio online.

  There is still plenty of human interaction behind the scenes at a robo platform such as building and rebalancing portfolios and setting investment strategies based on their economic and political outlook.

To make sure you get accurate and helpful information, this guide has been edited by Matt Miczulski as part of our fact-checking process.

Written by

Marc Shoffman

Writer

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Marc is an award-winning freelance journalist specialising in business and personal finance. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and Business Insider. He also co-presents the In For A Penny financial planning podcast. See full bio