
Robo advisors are a type of investment platform that uses algorithms to manage your investment portfolio. They're designed to be low-cost and easy to use.
To get started, you'll typically need to answer a few questions about your financial goals and risk tolerance, which will help the robo advisor create a customized investment plan. This plan will determine the mix of assets in your portfolio.
Robo advisors often offer a range of investment options, including stocks, bonds, and ETFs. They may also offer tax-loss harvesting, which can help minimize taxes owed on investment gains.
Take a look at this: Are Robo Advisors Worth It
What is a Robo Advisor?
A robo advisor is a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision.
Robo advisors collect information about your finances, assets, and goals by having you complete an online questionnaire.
They consider your risk tolerance, which is the level of investment risk for your situation, to offer financial solutions.
See what others are reading: Risk Parity
A typical robo advisor will build you a portfolio and automatically invest your assets.
Robo advisors require little to no human interaction, but many providers have advisors available for questions.
They often have low or no minimum requirement for investment, making it easy to get started.
In many cases, you can start investing quickly, within a matter of minutes.
Robo advisors use computer algorithms and software to build and manage your investment portfolio.
They can include services like automatic rebalancing and tax optimization.
How Robo Advisors Work
Robo advisors use mathematical algorithms to provide financial advice with minimal human intervention. They typically ask you questions about your risk tolerance, financial status, and desired return on investment to create a personalized investment strategy.
You'll be asked to open an account and transfer funds into it to begin investing. The robo advisor will then use that information to suggest a mix of different types of investments to help support your goals and objectives.
See what others are reading: Hedge Fund Financial Analyst Salary
Robo advisors use online questionnaires to obtain information about clients' degree of risk-aversion, financial status, and desired return on investment. This information helps the algorithm create a tailored investment strategy.
Most robo advisors build their portfolios out of low-cost exchange-traded funds (ETFs) and index funds, which are baskets of investments that aim to mirror the performance of a stock market index. You'll pay the fees charged by those funds, called expense ratios, in addition to the robo advisor's management fee.
A key element of how robo advisors work is the modern portfolio theory (MPT), which helps maximize returns without taking on too much risk. The advisor manages your portfolio automatically over time, working to keep you on track for the future.
Robo advisors can offer between five and 10 portfolio choices, ranging from conservative to aggressive. The service's algorithm will recommend a portfolio based on your answers to the questionnaire, but you should be able to veto that recommendation if you'd prefer a different option.
Investing with a robo advisor is generally low-cost and requires little to no human interaction. Some robo advisors offer hybrid models that include human interaction, but pure robo advisors are entirely automated.
The level of service provided, and portfolio-building methodology can vary widely among robo advisors. Always make sure that you are comfortable with the type of service and the robo advisor that you've chosen before you invest.
Curious to learn more? Check out: Risk Appetite News
Robo Advisor Costs and Fees

Robo advisors are generally much cheaper than traditional managed options, with advisory fees usually ranging from 0.25% to 0.50% of your invested assets.
Fidelity Go, for example, charges no advisory fees on account balances less than $25,000, and requires no minimum to open an account.
You may pay additional management fees on certain investments, such as mutual funds and ETFs, which can add to your total costs.
With Fidelity Go, they use a combination of mutual funds that don't charge management fees, making it a cost-effective option.
The fees are typically swept from your account, prorated and charged monthly or quarterly, so you won't have to worry about a big upfront bill.
For an account balance of $10,000, you might pay as little as $25 a year in fees, which is a small price to pay for professional investment management.
Some robo advisors require an initial investment of $5,000 or more, but others have no account minimum or lower requirements, such as $100-$500.
For your interest: Investor Relations Advisory
Benefits and Risks

Robo advisors can offer a more passive approach to investing, but it's essential to monitor and adjust your portfolio according to your needs. Handing off your investments to a robo advisor and putting them on autopilot may yield unexpected results.
You should consider the extent to which you need personalized investment advice or interactions with a financial services professional. Before choosing to use a robo advisor, reflect on these questions:
- Does the robo advisor build a portfolio based on your financial goals while taking into account your appetite for risk?
- Are you comfortable and familiar with the types of investment products the robo advisor will use to build your portfolio?
- Do you like discussing ideas or asking questions when seeking financial advice?
- Do you want the ability to make decisions based on market fluctuations?
- Are you considering any tax consequences that you may encounter for investment losses and/or gains?
- Are you comfortable and familiar with the robo advisor's fee structure and compensation model?
Considerations for Investing
Investing with a robo-advisor can be a great option, but it's essential to consider a few things before diving in. A robo-advisor can help manage risk by diversifying your portfolio, monitoring the markets, and automatically rebalancing your investments.
It's crucial to understand that all investing involves risk, and a robo-advisor can't guarantee against loss. However, it can help minimize risk by spreading your investments across different asset classes.
To get the most out of a robo-advisor, you should be comfortable with the idea of someone else making investment decisions for you. This means being okay with the potential for losses, as well as the possibility of not being able to make changes to your portfolio in real-time.
Suggestion: What Is a Downside Risk

You should also be aware of the fees associated with using a robo-advisor. These fees can eat into your returns, so it's essential to understand how they work and what you're paying for.
Some robo-advisors offer hybrid services, which include access to a human financial advisor. This can be a good option if you want the benefits of a robo-advisor but also need personalized advice.
Before choosing a robo-advisor, consider the following questions:
- Does the robo-advisor build a portfolio based on your financial goals and risk tolerance?
- Are you comfortable with the types of investment products the robo-advisor uses?
- Do you like discussing ideas or asking questions when seeking financial advice?
- Do you want the ability to make decisions based on market fluctuations?
- Are you considering any tax consequences that may affect your investment decisions?
Here are some key features to look for in a robo-advisor:
Ultimately, the right robo-advisor for you will depend on your individual financial goals and preferences. Take the time to research and compare different options to find the one that best fits your needs.
Robo-Advisors vs. Human Advisors
Financial advisors charge high fees for their expertise, management, and ability to execute trades. These fees can be a major drawback for many investors.
Human advisors provide a level of subjectivity and personalization that's hard to replicate with robo-advisors. They take into account each client's unique attitude towards risk and goals.
Robo-advisors, on the other hand, charge relatively low or negligible fees. However, this comes at the cost of less personalized advice.
Robo-advisors offer investors more flexibility, lower costs, and higher control over their investments. But they lack the expertise and subjectivity provided by human advisors.
On a similar theme: Private Equity Retail Investors
Types of Robo Advisors
Robo advisors come in different forms, each with its own unique features and benefits. There are two main types: hybrid robo advisors and pure-play robo advisors.
Hybrid robo advisors offer a mix of human and automated investment advice. They often have a team of financial advisors who can be contacted for personalized advice.
Pure-play robo advisors, on the other hand, use algorithms to make investment decisions entirely on their own. They don't offer human advice or support.
Some robo advisors, like Betterment, offer a range of investment portfolios with varying levels of risk. They also provide tools for investors to set and track their financial goals.
Other robo advisors, like Wealthfront, focus on offering low-cost index funds and ETFs. They also offer tax-loss harvesting, which can help investors minimize their tax liability.
Robo advisors like Schwab Intelligent Portfolios don't charge management fees. However, they do require investors to keep their accounts with the robo advisor's parent company.
Some robo advisors, like Personal Capital, offer financial planning tools and services beyond just investment advice. They can help investors track their income and expenses, and provide guidance on budgeting and saving.
A fresh viewpoint: Find Angel Investors
Popular Robo Advisors
Robo advisors use different pieces of information about an investor to suggest an investment strategy. They typically ask questions online or through an app about your financial situation, goals, and risk tolerance.
You'll be asked about your current financial situation, which helps the robo advisor understand your needs. This information is used to suggest a mix of different types of investments.
The robo advisor will also ask about your goals and when you need the money, which helps them create a portfolio that aligns with your strategy. They'll consider your risk tolerance to determine how comfortable you are with market ups and downs.
Most robo advisors rebalance your account by automatically buying and selling investments to keep you on track over time. This helps maintain a portfolio that aligns with your investment strategy.
Additional reading: Buy and Hold Strategy
Frequently Asked Questions
What is the average return on a robo-advisor?
The average return on a robo-advisor is around 3.5% per year, but actual performance can vary based on market conditions and asset allocation. Returns from robo-advisors typically range from 2% to 5% per year.
Sources
- https://www.fidelity.com/learning-center/smart-money/what-is-a-robo-advisor
- https://www.nasaa.org/investor-education/millennial-money-mission/robo-advisers/
- https://corporatefinanceinstitute.com/resources/wealth-management/robo-advisors/
- https://www.nerdwallet.com/article/investing/what-is-a-robo-advisor
- https://www.breadfinancial.com/en/help/financial-education/topics/responsible-saving/robo-advisors-for-investing.html
Featured Images: pexels.com