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What Is a Robo-Advisor?

Robo-advisors are a cost-effective way to plan your financial future. Learn more about what they do and how they work.

The world of finance is becoming more and more advanced. Now, you can hire an AI to handle your investments. These are financial robo-advisors comprised of robust algorithms and math to give you advice.

Having a computer do all the financial work for you sounds like a good deal, right? However, it may not be the best fit for everybody. In this article, we’ll break down exactly how robo-advisors work, what they do, and the pros and cons of hiring one. You’ll also learn whether it’s a good fit for you and how to pick one out.

Key Takeaways

  • Robo-advisors are automated portfolio managers that trade securities on your behalf.
  • After you provide information regarding your goals, risk tolerance, and time horizon, a robo-advisor will typically invest according to a model portfolio. Then, it will monitor and rebalance as necessary.
  • Because of their low account minimums, robo-advisors are typically geared toward novice and intermediate investors.
  • Using a robo-advisor means you’ll likely get little to no face-to-face interaction with an advisor. Some firms, however, offer hybrid arrangements.

How Robo-Advisors Work

Robo-advisors help build you an investment portfolio using state-of-the-art algorithms and math. The algorithms one uses are originally designed by several real financial and investment advisors, as well as mathematicians. When you hire one, you should expect little interaction with any human experts.

Most often, a robo-advisor serves as an “automated investment manager,” helping you handle your portfolio. It may also provide financial advice which pertains to your current situation and goals. However, you shouldn’t expect one to help you with real estate, retirement or estate planning, or risk management.

When you use one, it’ll ask you several questions about your financial situation, goals, risk tolerance, and more. Once it has a better perspective of you as an investor, it’ll come up with a portfolio strategy. Often, the computer will recommend options like index, mutual, or exchange-traded funds (ETFs).

Robo vs. In-Person Advisors

Robo- and in-person advisors may seem similar, but their offerings are very different. The former asks you a series of questions, then tailors a portfolio to you. The latter can often do the same, plus give you advice in real time based on their personal experience. They can also help with planning tasks, which a computer can’t.

Where a robo-advisor sets itself apart is price and convenience. An automated investment manager is much cheaper than an in-person expert. It’ll charge a portfolio management fee, whereas a human professional requires a fee that could be hourly, per project, or based on your assets.

In the table below, you can see a more visual comparison between a robo and in-person advisor:

Robo-AdvisorsIn-Person Advisors
CheaperMuch more expensive
In general, only involves portfolio management and no planning services.Includes financial planning, as well as investment management.
Uses computer algorithms and data science to make decisions.Uses real-world experience and education to give you advice.
Doesn’t require any time-consuming appointments.Requires you to participate in a video or physical appointment.

Robo-Advisor Pros and Cons

Hiring an automated portfolio manager can be a convenient option, especially if you’re on a tight budget. But, as always, there are pros and cons for you to consider. Below is a look at the ups and downs of using a robo-advisor for your financial advising and investing needs:


  • Low barrier to entry. Using an automated advisor requires little experience and typically a small minimum investment. For example, Wealthfront only requires an account minimum of $500. Keep in mind that others may require more, and this may be a consideration in your search for one.
  • Quick and easy. Getting started is usually as easy as signing up for an account and answering a few questions. No in-person or video appointments are needed. 
  • Affordable. Fees are usually much cheaper for a robo-advisor than an in-person one. If you know what you want to accomplish with an online portfolio manager, this could be a great option to save money.
  • Constant monitoring. Most automated investment managers continuously monitor your portfolio and may suggest changes or other investments you can make.


  • No real-world experience. An in-person advisor brings certain real-world experience that a computer, even with its algorithms and advanced math, simply doesn’t have.
  • Little to no human interaction. This goes hand-in-hand with the above bullet. Hiring a robo-advisor means you’ll have minimal interaction with a real person. With this, the burden of figuring out your portfolio is on you and a computer, which you can’t speak to.
  • Basic investment selection. Automated portfolio managers typically limit their suggestions to ETFs, index funds, and mutual funds. It may also target stocks based on your risk tolerance. Other options, such as real estate, aren’t part of the equation.
  • Doesn’t typically include financial planning services. Automated investment managers normally don’t normally include planning as part of the package. Tax, retirement, and estate planning are something you’ll likely have to use an in-person advisor, such as a CFP, for.

Who Should Use a Robo-Advisor

For some, hiring a robo-advisor is a great fit. It can allow one to easily begin an investment portfolio with a low barrier to entry. But it’s not ideal for every investor.

Typically, they’re great for an investor who’s either just getting started or with a lower net worth. The affordability and ease of use make it worthwhile for beginners. It may also be ideal for those with little time on their hands to commit to investing.

Austin Scott, a certified financial planner (CFP) with Pinnacle Ascent Wealth Management in Washington state, says that robo-advisors “can be great for investors just starting out, or those looking for an ‘auto-pilot’ style of investing.” However, he adds that “you should consider sitting down with an advisor as your wealth grows and your goals get more complex.” Essentially, while working with a robo-advisor can be helpful, you should make sure the advice you’re receiving is “in your best interest.”

Who Shouldn’t Use One

Automated investment managers can only help with so much. At some point, your assets may need a real person’s touch. If you have either a large portfolio to manage or plenty of funds on hand, you may want to go for an in-person financial advisor instead.

A human financial advisor can help with larger investments that a computer just can’t, such as real estate. And, if they have expertise in planning, they’ll be able to assist with that as well.

Bottom Line

Ultimately, a human is probably the way to go if you have complex needs or a ton of assets to manage. But if you’re a new investor who’s looking for a low barrier to entry, a robo-advisor may be just what you need.

How Much They Cost

Robo-advisors are typically much cheaper than in-person ones. Like a normal financial consultant, they often charge a fee which is a percentage of your assets under management (AUM). Or, in some cases, you may opt to pay a monthly fee instead.

An AUM percentage fee may be anywhere from 0.25% to 0.50%. The exact amount varies based on the amount of assets you have and the company you choose.

How to Pick a Robo-Advisor

Now that you’ve decided to use a robo-advisor, you’ll have to pick one out of the dozens out there. Many of them, on the surface, will seem very similar. To make the right choice for your needs, you’ll want to consider these questions:

  • How high are the fees? As always, price is one of the most important factors. Pay close attention to the portfolio management fees the company’s charging vs. its competitors.
  • What is the minimum investment? Robo-advisors will have a minimum investment amount. Some are higher, and others lower. You’ll want to pick one that fits your situation.
  • How good (or bad) are its reviews? Before you settle on an option, it’s always a good choice to read the reviews. Are they mostly positive or are there some red flags? Is the app user-friendly or is it glitchy? This is how you can ensure there are few surprises down the road.

To give you an idea of the prominent names out there in the industry, below are 13 robo-advisor firms we’ve identified and reviewed (in alphabetical order):

  1. Acorns
  2. Betterment
  3. Fidelity Go
  4. Ellevest
  5. Merrill Guided Investing
  6. Morgan Stanley Core Portfolios
  7. Schwab Intelligent Portfolios
  8. SigFig
  9. SoFi Wealth
  10. TD Automated Investing
  11. U.S. Bank Automated Investor
  12. Vanguard Digital Advisor
  13. Wealthfront

Robo-Advisor Regulations

Like any other investment advisor, a robo-service must follow specific regulations by the U.S. Securities and Exchange Commission (SEC). A legitimate one must be a registered investment advisor (RIA). These are individuals or firms who offer investment advice “for compensation.”

An RIA must also act in a fiduciary capacity, which has a legal obligation to put your needs and well-being above all else. In this way, you can technically consider a robo-advisor to be a fiduciary that works for your benefit. If it doesn’t, the company offering the service may be held liable for any damages it causes.

To verify a company’s RIA status, you can either use the SEC’s free search tool or FINRA’s BrokerCheck.

Frequently Asked Questions

Are automated advisors worth it?

This depends on your goals and needs. For example, if you’re a new investor who’s looking for a quick and easy start, it may be worth it. But if you’re a high net-worth individual or someone who requires extensive financial planning, it may be time to seek a human expert.

Are robo-advisors fiduciaries?

Yes, they’re fiduciaries. All robo-advisors in the U.S. must register with the SEC as an RIA.

Are robo-advisors safe?

There’s always a risk with investing, even if an advisor is helping you do so. However, automated investment managers do their homework by using advanced algorithms and data science. This helps them advise you toward informed decisions and investments.

Robo-advisors tend to recommend investments such as ETFs, index funds, and mutual funds, which ebb and flow with the market. And, based on your risk tolerance, you may receive suggestions for more aggressive stocks. However, as with any investment you make, it’s best to accept that you may lose money.

Can AI investment managers make you money?

You can make money with one, but it’s also a possibility that you can lose some. It’ll recommend investments that it believes are in your best interest. But it’s ultimately up to you to decide where you allocate your money. To sum it up, you shouldn’t view a robo-advisor as a surefire way to riches, but as a helpful tool.

Is Betterment a robo-advisor?

Yes, Betterment is an automated investing company. It was the first one in history, launched back in 2008 by Jon Stein. For new investors, the company offers very low entry costs, including a 0.25% fee and a $0 minimum balance.