Is Using a Robo-Advisor the Smart Move for Your Finances?

Investing can be confusing, especially if you're not sure where to start. That's where robo-advisors come in. These automated tools make investing easier by managing your money for you, using smart technology instead of a human advisor.

What exactly is a robo-advisor?

If you're just starting out with investing or even if you’ve been at it for a while, it's normal to seek guidance when making investment decisions. A growing trend in recent years is the use of robo-advisors—digital platforms that use algorithms to handle your investments automatically. Essentially, it’s automated financial advice powered by technology, helping to simplify portfolio management by saving you time and reducing uncertainty and stress.

How They Work?:

It all starts with a detailed questionnaire that asks about your financial goals, how much risk you're comfortable with, and how long you plan to invest. This helps the robo-advisor get a clear picture of your financial background and investment style.

Using your answers, the robo-advisor builds a customized investment portfolio suited to your needs. The goal is to align your investments with your risk tolerance and long-term goals, usually based on strategies like diversification and Modern Portfolio Theory (MPT).

After your customized portfolio is set up, robo-advisors don’t just leave it alone. They constantly track your investments, using data and market trends to make smart updates when needed. This ongoing adjustment ensures your portfolio stays balanced and continues to match your financial goals.

Because the process is fully automated, it avoids emotional or biased decisions that can hurt your investments. Instead, it follows a consistent, disciplined strategy—even during market ups and downs—which is especially helpful for those who might be tempted to make impulsive changes.

What Does a Robo-Advisor Cost?

Robo-advisors are generally more affordable than traditional financial advisors. Their fees are usually tied to how much money you have invested, with most platforms charging an annual management fee between 0.25% and 0.50%. That’s noticeably lower than the typical 1% fee charged by human advisors.

Unlike standard brokerage accounts—which often include fees for trades, rebalancing, deposits, or withdrawals—most robo-advisors include these services at no extra cost.

What If You Prefer Talking to a Real Advisor?

If you're interested in using a robo-advisor but still want the flexibility to speak with a human advisor when needed, a hybrid service might be a great fit. This option allows you to handle most of your investing online, while still giving you access to an advisor for support when questions or concerns arise.

For those who feel more comfortable having a dedicated advisor actively managing their investments, a personalized financial advice service is also available—though it typically requires a minimum investment of $500,000 to get started.

Pros and Cons of Using a Robo-Advisor

Advantages:

A major benefit of robo-advisors is their affordability. By relying on automation and algorithms with little need for human involvement, these platforms keep operational costs low—allowing them to offer management fees between 0.25% and 0.50% annually. This makes them a budget-friendly alternative to traditional financial advisors, who usually charge higher fees for their services.

Robo-advisors also stand out for their accessibility. Unlike many traditional advisors who may require a large initial investment, most robo-advisors let you start with just a few hundred dollars—or sometimes even less—making them an appealing option for new or small-scale investors.

Disadvantages:

One drawback of using a robo-advisor is the limited access to personal guidance. If you go through a major life change that impacts your finances, you might want to speak with a financial advisor—but that option isn’t always available with robo-advisors. That said, hybrid services that combine automated investing with access to human advisors can help bridge that gap.

Another limitation is the restricted range of investment options. Robo-advisors usually offer a curated selection of diversified assets, such as ETFs and mutual funds. If you enjoy actively managing your own portfolio and picking individual investments, you might prefer a traditional brokerage account for greater flexibility.

Lastly, robo-advisors might not be able to manage all of your financial accounts. For example, if you have a 401(k) or other investments held elsewhere, it could be challenging to get a full view of your financial situation through a single robo-advisor platform.

Do Robo-Advisors Provide Financial Planning?

Robo-advisors can assist with financial planning, but they don’t typically create fully personalized financial plans. Some platforms may provide advice on retirement savings, debt repayment, and setting specific financial goals.

If you're seeking a more tailored financial planning approach, it might be helpful to compare different investment advice services to find the one that best aligns with your needs.

Should You Choose a Robo-Advisor?

Before deciding to use a robo-advisor, there are several factors to keep in mind. In some situations, working with a human advisor might be a better option. Additionally, robo-advisors vary in their services—some are designed for beginners and offer a fully automated experience, while others provide more flexibility and allow for greater involvement in the investment process.

Robo-Advisor Fees

Robo-advisors typically offer lower fees and smaller minimum investment requirements compared to traditional advisors, but it’s important to weigh if these savings are worth the trade-off. The lower cost often means less personalized advice and fewer investment options.

On the other hand, traditional advisors may charge higher fees, but they can offer more tailored, in-depth financial guidance, potentially delivering greater long-term value for your investment strategy.

What Are the Typical Returns of a Robo-Advisor?

The returns from a robo-advisor depend on the investment strategy chosen and current market conditions.

For instance, a conservative strategy focused mainly on bonds may offer lower returns but with less fluctuation. On the other hand, a more aggressive growth strategy is likely to be more volatile but could generate higher potential returns. It's essential to align the strategy with your risk tolerance and financial objectives.

Additionally, returns are influenced by the specific assets and funds used to build portfolios of varying risk levels. However, since most robo-advisors utilize similar investment approaches and rely on low-cost index ETFs, returns for comparable risk levels tend to be fairly consistent over time.

How Do Robo-Advisors Handle Risk?

Robo-advisors primarily manage risk by diversifying your investments, spreading them across various asset classes to reduce the impact of potential losses. They also use algorithms to adjust your portfolio in response to market fluctuations and to implement tax-loss harvesting strategies. While these techniques help manage risk, it's important to note that they cannot completely eliminate it.