What Is a Robo Advisor?

 

Robo advisors are more than just robots sitting at a computer. Find out how they can potentially help you reach your investment goals

With a robo advisor, your money is invested in a professionally-managed portfolio that is optimized for your investment goals. Keep reading to learn more about what robo advisors are, how robo advisors work, and whether a robo advisor makes sense for you.

What is a Robo Advisor?

There are many definitions of what exactly robo advisor is. To put it simply, a robo advisor is a method of automating the asset allocation of investments via a computer algorithm.

In a broader sense, a robo advisor may also include human financial advisors but only for services that require human assistance (e.g., taxes, retirement, or estate planning).

Understanding How Robo Advisors Work

Behind the scenes, robo advisors are managed by investment professionals who work similarly to traditional financial advisors. Instead of serving one customer at a time, the robo and human advisors work together to serve thousands of customers at once.

When you sign up for a robo advisor, you’ll answer a survey with questions about:

• Your age
• Your Investment goals
• Risk tolerance
• Other nuances

What To Consider When Hiring a Robo Advisor

When choosing a robo advisor, the most important factors will vary based on your goals. Here are some common criteria to consider when picking a robo advisor:

• Accounts supported: If you want a specific type of retirement account, it’s important to pick a robo advisor that supports that type of account. Some advisors offer just one or a few accounts, while others offer more broad support for taxable, retirement, custodial and other needs.
• Costs and fees: One of the biggest draws to robo advising is the low cost. However, every advisor has its own pricing model. Shop around to find the right deal for your goals. A slightly higher fee can easily add up to many thousands of dollars over years of investing.
• Investment portfolios: Some robo advisors have just a few pre-designed portfolios. Others customize your portfolio weighting or offer special portfolios for sustainability and other investment priorities.
• Advanced features: Depending on your goals, tax-loss harvesting, and other advanced features may be a draw. If you’re deciding between two or three favorites, this may be a good tie-breaker.

How Much Should a Robo Advisor Cost?

Robo advisors charge in two ways. First, you’ll pay a management fee, if one applies. Second, you’ll likely be charged fees by the funds your robo advisor chooses for you. Here’s how to assess those fees:

Management Fees

The first fund to look for is the management fee. This is a fixed fee that robo advisors charge for choosing your investments and other services they provide. Depending on the robo advisor you choose, you can expect to pay anywhere from 0% to around 0.50% per year based on your portfolio balance, though some charge more.

Fund Fees

Even after you’ve paid your management fee, you’re still not done paying. Each fund that the robo advisor picks for you likely charges its own fee. While some exchange-traded funds (ETFs) may charge more, most robo advisors make a point of keeping client funds in low-fee funds.

Is a Robo Advisor Right For You?

The answer to this question depends on your net worth, your investments' complexity, and whether you feel comfortable investing by yourself. I believe that robo advisors add value and that you can't easily replicate their results by using Fidelity or Vanguard funds.

Most of my family assets are DIY, but I've also used robo advisors for a six-figure chunk. I feel very comfortable using and recommending robo advisors.

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Are Robo Advisors Safe and Secure? 

The online tools robo advisors offer aren't new. Traditional financial advisors had the same tools available to them for years and could roll up a personalized asset allocation plan. Robo advisors push the technology down to the masses. You have direct access to manage your account and it removes the non-value-added middlemen.

How Do Robo Advisors Make Money?

The main way robo advisors make money is through management fees. Also, some may make money by sending investment dollars to the company’s own family of funds. For example, the no-fee Schwab Intelligent Portfolios product uses low-fee Schwab ETFs, which do charge fees.

It’s always important to understand how you’re charged so you can make the best decisions for your money.