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Even if you don’t know a lot about investing or have a lot of cash to invest, robo-advisors can be a cost-effective way to put your money to work.
A robo-advisor is a type of digital financial advisor that uses an algorithm to craft a personalized investment portfolio. Find out if one is right for you and your financial goals.
Key Takeaways
- Robo-advisors provide a low-cost way to start investing even for those with limited funds or experience.
- Investors can take advantage of features like tax-loss harvesting and automatic rebalancing.
- Individuals with more complex finances may need personalized advice, which may be better served by a human financial advisor.
When you first use a robo-advisor, you may be asked a series of questions about your finances and goals. You may be asked about your investment horizon, risk tolerance, and age.
The robo-advisor will then choose investments for you—typically, low-fee mutual funds or exchange-traded funds (ETFs). Depending on the robo-advisor, some offer a fixed asset allocation that they’ll maintain through periodic rebalancing or will offer a glide path option where your allocation becomes more conservative as you approach your goal, like retirement.
Tip
Because robo-advisors offer varying services and charge different fees, consider shopping around for the best robo-advisors to find one that fits your needs.
Robo-advisors make money by charging a fee, which is either a percentage of the assets under management or a recurring annual or monthly fee. This fee is charged in addition to the expense ratios charged on the funds in your portfolio.
So, how do you know if a robo-advisor is right for you?
Who Should Consider Using a Robo-Advisor?
Typically, robo-advisors have low account minimums and charge modest fees, making them accessible to everyday investors who can’t afford a regular financial advisor or who don’t have the minimum net worth often required to see one.
According to a recent analysis by Morningstar, the median robo-advisor fee was just 0.25% in 2024. And of the 16 major robo-advisors Morningstar analyzed, one-quarter had investment minimums of $50 or less.
Robo-advisors can also be a good choice for people who lack the time or knowledge to make investment decisions themselves. Since robo-advisors offer automatic rebalancing, investors don’t have to worry about regularly checking their investments to see if their portfolio has drifted from their target allocation.
A robo-advisor can be helpful during periods of market volatility, too. Unlike people, who are prone to making rash, emotional decisions when markets turn volatile, a robo-advisor may act more rationally during market stress.
Additionally, robo-advisors often offer features like tax-loss harvesting—which is a strategy that involves selling losing investments to offset capital gains. Investors who want to minimize their tax bill can do so without additional effort.
Plus, for those who don’t necessarily have the funds to spend on a traditional financial advisor and still want extra help, some services, like Betterment Premium, offer access to a certified financial planner.
Who Might Benefit From a Human Advisor?
Although robo-advisors may be affordable, sophisticated investors or those with more complex finances may be better off hiring a human financial advisor.
For example, if you own a business, need help with estate planning, or want to create a retirement withdrawal strategy, a CFP can provide guidance based on your unique financial circumstances.
Since robo-advisors primarily invest in ETFs and mutual funds, those who want a wider menu of investment options—like individual stocks, cryptocurrency, and options—should consider opening a brokerage account instead.
Another downside of robo-advisors is that they may not be able to view your finances holistically, taking into account the investments and cash you have elsewhere. For example, a financial advisor might have a better understanding of your overall portfolio allocation because they have information on your 401(k) as well as checking and savings accounts.
How Do Robo-Advisors Determine the Best Asset Allocation for My Portfolio?
When you open your account, the robo-advisors will ask you a series of questions to determine your financial goals and risk tolerance. It will then create an asset allocation that aligns with your responses.
Do Robo-Advisors Handle Complex Financial Situations?
Robo-advisors are best suited for basic investing situations as they build asset portfolios from a collection of customizable templates that rely on mathematical algorithms. If you have complex finances, non-standard needs or goals, or a variety of accounts, a traditional financial advisor may be a better choice.
Can I Add or Withdraw Money From My Robo-Advisor Account at Any Time?
Most robo-advisors allow flexible deposits and withdrawals. However, investment trades may take a few days to settle. Before you withdraw funds from your account, make sure you understand the tax implications of any required trades. This is especially true for withdrawals from a tax-advantaged retirement account.
The Bottom Line
A robo-advisor can be a solid choice for investors who want a set it and forget it approach to investing. With some robo-advisors, investors can start with as little as $50 and even receive features like tax-loss harvesting.
However, a robo-advisor may not be right for everyone, especially for those with more complex financial situations who would benefit from personalized advice.
