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If you’ve thought about investing, there are many different directions you can go. If you feel confident in your skills, you can always open your own brokerage account and build a DIY portfolio. On the other hand, there are professionals who can manage your investments for you. But what if you want professional investing help, but you have some objection to using an advisor, such as high fees? A robo-advisor offers you the ability to receive automated, informed investment management with lower fees and minimums.
Do you have questions about managing your investments within your financial plan? Speak with a financial advisor today.
What Is a Robo-Advisor?
A robo-advisor can manage your investment portfolio digitally by trading, rebalancing and applying tax-loss harvesting strategies, among other serivces. It doesn’t rely on human intervention the way traditional advisors do. In fact, most robo-advisors don’t have any human advisors for clients to talk to.
Instead, a robo-advisor uses software and tools to digitally manage their clients’ financial investments. The tools and software that robo-advisors use aren’t actually new. Traditional advisors have been using them for years. The difference is that traditional human advisors use these tools, as well as their own experience, to manage your investment portfolio.It is a more labor-intensive approach that requires a lot of research, which comes at a higher cost.
One of the most prominent robo-advisory services is Betterment, which offers a significantly lower percentage-based fee than its human counterparts.
How a Robo-Advisor Can Be Helpful
The biggest reason that robo-advisors are growing in popularity is their usually low costs.Many traditional advisors also require you to have a certain amount of money to invest in order to become a client. The threshold may be too high for the average person to qualify. With a traditional advisor, you typically pay an annual fee of 1% – 2% of your assets under management (the amount you have invested with the advisor). Some advisors may charge you even more. As your portfolio grows in size, that adds up to a lot of money.
Many robo-advisors charge an annual fee between 0.25% and 0.85%. That’s less than half of what you would pay with a traditional advisor. They may also have a minimum in order to open an account, but it’s usually far less than what you’d find with a traditional advisor.
Another reason for the popularity of robo-advisors is the fact that everything is automated and online. For people interested in passive investing strategies, robo-advisors provide a “set it and forget it” strategy that allows them to make deposits and check their balances without having to make decisions. And if you want to change something, just log in to your account and make necessary changes.
How a Robo-Advisor Manages Your Investments
When you create an account with a robo-advisor, you will have to answer a series of questions. You’ll provide information such as your age, income, current savings, and financial goals (like planning for retirement). You will also answer questions about your risk tolerance.
Risk is the possibility that your investments lose money if a company or if a market doesn’t perform well. Your risk tolerance is the amount of variability you can handle with your investments. If you will need your money in five years and you can’t afford to lose any of it, you have a lower risk tolerance than someone who won’t need their money for 20 years and can thus afford to wait out a downswing in the stock market.
All robo-advisors ask slightly different questions and some differentiate themselves by asking about particular aspects of your life. For example, Motif Investing tries to align your investments with social causes that are important to you. Regardless of the exact questions, the robo-advisor will use your answers to create a balanced portfolio that matches your financial goals.
Most robo-advisors create your portfolio with exchange-traded funds (ETFs). An ETF is a fund that contains multiple individual stocks, and lets investors buy shares of the fund itself. ETFs add diversity to your portfolio, and diversity provides safety. This is why diversity is an important part of the strategy that robo-advisors use. Robo-advisors typically invest based on modern portfolio theory (MPT). MPT states that you can maximize your returns, while minimizing risk, by investing in a diverse and balanced portfolio.
Once the robo-advisor creates a portfolio for you, all management happens digitally. You don’t have to worry about things like trading or rebalancing. Some robo-advisors also use more advanced management techniques, like tax-loss harvesting, which is a technique that prioritizes minimizing your capital gains taxes.
Robo-Advisor vs. Human Advisor: Benefits and Drawbacks
Robo-advisors stand out for their cost efficiency. Most charge annual fees between 0.25% and 0.85% of assets under management (AUM), while human advisors often charge 1% or more. Over decades of investing, that fee difference can amount to tens of thousands of dollars in savings. Robo-advisors also typically require lower minimum investments, making them accessible to people who are just starting out.
Automation is another advantage. A robo-advisor can handle rebalancing, dividend reinvestment and tax-loss harvesting without the client lifting a finger. This appeals to investors who prefer not to track markets or place trades themselves. The platforms also use algorithms rooted in modern portfolio theory to keep allocations diversified and risk-adjusted.
Human advisors, however, offer a level of personal insight that software cannot match. They can take into account not just your assets, but also your career plans, family situation, real estate, inheritance goals, and tax strategies. This broader view can lead to more integrated planning, especially if you have multiple accounts or business interests that require coordination.
Another key difference lies in guidance during market volatility. A robo-advisor will stick to its programmed rules regardless of market conditions. A human advisor, by contrast, can help a client avoid panic selling, adjust contributions or rebalance strategically. Behavioral coaching is one of the most valuable services that human advisors provide, particularly when emotions run high.
The choice often comes down to complexity. For straightforward goals like building retirement savings, a robo-advisor offers low cost and convenience. But, for investors with more complicated finances, such as estate planning, tax optimization, or small business ownership, a human advisor’s personalized approach may be worth the higher fee. Many investors find value in combining both—using a robo-advisor for core investments while consulting a human advisor for advanced planning needs.
Bottom Line
Robo-advisors manage billions of dollars in assets. They are often geared toward beginners and focus on simple goals such as retirement savings. They handle the daily management of investments without requiring client involvement. This makes them appealing for those who prefer a hands-off approach, though individuals with complex portfolios may still benefit more from working with a financial advisor who can tailor strategies that align with their income, investments, and long-term goals.
Investing Tips
- Managing your investments on your can be a lot to handle. A financial advisor can help with this, though. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Robo-advisors make investing affordable for the average person. However, there is an even more affordable option: Manage your own portfolio. Managing a portfolio sounds difficult and it might not be for you if you don’t have much time to learn. However, it is certainly doable once you learn a few basics. There are also a lot of resources that can help you to along the way with things like asset allocation.
Next Steps
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