A robo-advisor is a low-cost, online investing platform that employs software algorithms to create and manage investment portfolios. While financial professionals typically design the investing strategies employed by robo-advisors, the ongoing day-to-day management of the portfolios is handled by computers.
Traditional investment management companies and many financial advisors require their clients to maintain substantial account balances, and they tend to charge high annual management fees. Most robo-advisors have low or no minimum balance requirements and charge more affordable annual fees.
Robo-advisor services include automatic asset allocation, portfolio rebalancing and tax optimization. Many provide access to human financial advisors to help clients with investment planning.
Since they run automatically and are accessible online, robo-advisors can help you get started investing very quickly, often in a matter of minutes. They can help you take the emotion out of investing decisions, using proven strategies that are tailored to each user’s risk tolerance and financial goals.
How Do Robo-Advisors Work?
The robo-advisor experience usually begins with a brief questionnaire. A new user answers questions related to their age, income, investment goals and risk tolerance. Goals can be anything from saving for college expenses or a home down payment, to investing for retirement.
With this information in hand, the robo‑advisor builds the new user a diversified portfolio of ETFs or index funds from a limited menu of options selected by investment professionals. The choice of funds matches the goals and risk tolerance outlined in the questionnaire.
Once a user’s portfolio is set up, the platform’s software maintains the correct asset allocation in the portfolio, rebalancing holdings as needed so you don’t have to. Tools and visualizations are provided to let users track their progress, add contributions and potentially set up new goals.
What Are Hybrid Robo-Advisors?
Hybrid robo-advisors combine the benefits of human advisors and automated investment management.
They aim to provide the best of both worlds by combining the personalized advice and guidance of live advisors with the automated algorithms of robo-advisors. They typically use technology to streamline portfolio management and create efficiencies, while also providing access to human advisors for personalized advice, financial planning and other services.
Hybrid robo-advisors may be a good fit for investors who want the low fees and ease-of-use but also want the personalized advice and guidance of human advisors. They may also be a good option for investors with more complex financial situations or higher investment amounts who need more personalized attention.
Are Robo-Advisors Safe?
Robo-advisors are as safe as traditional investment services. All investing carries risks. You could choose bad investments and lose your money. Robo-advisors, like traditional advisors, encourage customers to mitigate risks through diversification.
Cybersecurity is also a risk with robo-advisors or any other online investing, but most reputable companies employ state-of-the-art encryption technology and other security measures to protect your accounts.
FAQs
Best Robo-Advisors for April 2024
- Best Overall, Best for Goal Planning, Best for Portfolio Construction, Best for Portfolio Management: Wealthfront.
- Best for Beginners, Best for Cash Management, Best for Tax-Loss Harvesting, Best for Crypto Portfolio Selection: Betterment.
- Best for Low Costs: SoFi Automated Investing.
They do not, however, generally function as stock brokers, instead choosing a basket of funds for you based on your goals. Don't expect a robo-advisor to beat the market since its goal is to maintain a balance with the market.
Which robo-advisors have tax-loss harvesting? ›
Best Robo-Advisors With Tax-Loss Harvesting at a Glance
- Wealthfront – Best for Goals-Based Investing.
- Betterment – Best for Beginners.
- Empower – Best for Net Worth Tracking.
- Axos Invest – Best for Self-Directed Trading.
But according to the Robo Report, the five-year returns (2017 to 2022) from most robo-advisors range from 2% to 5% per year. And Wealthfront, one of the best robo-advisors available, also states that customers can expect about a 4% to 6% return per year, depending on their risk tolerance.
Do millionaires use robo-advisors? ›
Nearly 7 in 10 Millennial millionaires have some money in robos or automated portfolios. Moreover, nearly 20% of Millennial and Gen Z households who know the investment products they own have some money in robos versus only 13% of Gen X and only 2% of Boomer+ households (Boomers and older).
What is the biggest downfall of robo-advisors? ›
Real estate, commodities, emerging market stocks, precious metals, and digital assets offer investors additional avenues to increase diversification and generate yield—particularly during times of high inflation. The problem is that most robo-advisors do not offer comprehensive exposure to these assets.
What are 2 cons negatives to using a robo-advisor? ›
The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.
How do I choose a robo-advisor? ›
Compare Robo-Advisor Expenses
Fees generally range from 0.15% to 0.50% of the assets under management. In addition, some advisors charge a one-time setup fee. Don't forget the expense ratios and transaction costs of the underlying exchange-traded funds or mutual funds.
Are robo-advisors worth it long term? ›
While a robo-advisor can be efficient in managing your investing decisions, a human advisor may be best for more complex decisions like helping you choose the right student loan repayment plan or comparing compensation packages for a new job. Cost: If cost is a factor, robo-advisors typically win out here.
Can you trust robo-advisors? ›
Robo-advisors, like human advisors, cannot guarantee profits or protect entirely against losses, especially during market downturns—even with well-diversified portfolios. Because most robo-advisors only take long positions, when those assets fall in value, so will the portfolio it has constructed.
Is Wealthfront Safe? Wealthfront carries the same safety protocols that you'll find in most major financial institutions. Your cash is insured by the FDIC, while investments are insured by the SIPC.
Is betterment better than Wealthfront? ›
Account Services Verdict: Tie
Betterment has two choices for your cash management and ATM fee reimbursem*nts and offers a slightly higher interest rate for new customers. Wealthfront has a large ATM network along with the ability to pay bills with its cash account while investors will enjoy paying $0 in fees.
What is a good robo-advisor fee? ›
Funds' expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more.
What makes a good robo-advisor? ›
The best robo-advisors charge low portfolio management fees and offer a range of services, including tax strategies, access to human advisors and a variety of portfolio options.
What is the future of robo-advisors? ›
Robo-advisors will need advanced technologies to improve their algorithms, drive more personalization in their offerings for millennials/ Gen Z investors. They need to involve human advisory at higher portfolio thresholds and expand distribution through Robo-for-advisor solutions.
Does Wealthfront outperform the S&P 500? ›
In 2022, the Wealthfront Smart Beta strategy outperformed its benchmark by 4.71%. Figure 4 shows the total return of each factor portfolio over the full comparison period, along with the total return of the S&P 500.
Do robo-advisors outperform the S&P 500? ›
Robo-advisors often build portfolios using a mix of various index funds. But depending on the asset class mix and the particular index funds selected, a robo-advisor may underperform or outperform a broad equity index like the S&P 500.
Do robo-advisors perform well? ›
While a robo-advisor can be efficient in managing your investing decisions, a human advisor may be best for more complex decisions like helping you choose the right student loan repayment plan or comparing compensation packages for a new job. Cost: If cost is a factor, robo-advisors typically win out here.
