What Is a Robo Advisor?
A robo advisor is an online financial advisor that automates its services to keep costs low. These digital advisors rely on automation to efficiently and inexpensively manage portfolios aligned to investors’ risk tolerances. They can be a great tool for people who want to get started investing, but if you want one-on-one help from a human, a robo advisor may not be the answer.
Quick take: Robo advisors typically appeal to passive investors who want to “set and forget” their portfolios. Stashing cash in a diversified portfolio of stocks and bonds is a really good way to grow your money over time, and robo advisors harness this fact for people who aren’t sure how to get started investing on their own. For a small fee, you let the robo advisor build your investment portfolio for you. Hey presto, you have commenced wealth-building.
Tell me more: The thinking behind robo advisors is that if you want to invest for a future goal, then you, like most of us, will be well-served by a passive, indexed, buy-and-hold investment portfolio aligned with your risk tolerance. When opening an account at a robo adivsor, you answer some questions about your goals and appetite for risk, and the robo advisor selects the best investment portfolio for your situation.
Here’s what to look for when searching for a robo advisor:
- Fees. Another appealing feature of robo advisors is that they typically cost less than half of what a human advisor would charge. A management fee of about 0.25% is common, but there is variation, so shop around. Keep in mind that you’ll pay mutual fund or ETF expenses in addition to the management fee. (This is why super frugal folks might want to DIY it; here’s more on how to invest for retirement.)
- Services offered. Some robos promise tax-loss harvesting; others might have really nice personal finance tools. Not sure where to start? Consider some of the big-name brokers like Fidelity Investments, Charles Schwab and Vanguard Group (links go to reviews on our sister site StockBrokers.com) — they all offer a robo advisor option. Or consider a robo that’s aligned with your needs or values. For example, Ellevest focuses on women’s unique financial challenges (the wage gap is real, people).
- Access to a human. Some robos let you meet with a human financial advisor or planner. If that’s important to you, be sure to compare robos based on what’s on offer and how much that extra service costs. Pro tip: If the robo gives you access to a Certified Financial Planner (CFP), that generally means you’ll be able to get answers to a wide range of money questions, plus financial planning strategies that take your overall life goals into account.
One more thing: One challenge investors face when using a robo advisor is transparency. Robo advisors’ descriptions of their investment processes are often on the vague side. The best human wealth advisors explain their investment philosophies and ensure you are a good fit for their services.
Bottom line: Robo advisors make passive investing super easy and are a great, low-cost option for people seeking help building an investment portfolio, especially for a long-term goal like retirement. Plus, they are considered fiduciaries, and that’s a great thing. But if you’re looking for in-depth help on a unique or complex financial topic, you might need to hire a human financial advisor or other expert.
Did you know?
Long-term savers/investors can pay even less in fees by setting up a systematic investment plan into two or three complementary index funds.
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