Pros explained
- Low costs: Most robo advisors have lower management fees than you might see with financial advisors or wealth managers. Additionally, most portfolios are created with low-cost ETFs, making them less likely to reduce your real returns with expense ratios.
- Hands-off approach: Robo advisors do the heavy lifting involved with portfolio growth and management. This can be especially helpful to beginning investors who want to grow their wealth, but don’t know how to start investing. Even more experienced investors who want to set up a system and automate their investing for long-term goals can benefit from robo advisors.
- Small amount of money to start: Even though some robo advisors have high account minimums, most robo advisors allow you to start with $500 or less. There’s likely a robo advisor that fits most budgets.
Cons explained
- Limited human advice: Most robo advisors lack access to one-on-one help from an advisor, which some investors might find off-putting. Algorithms don’t have the same human experience or nuance. You might need to pay to access financial advisors if the robo advisor does not offer the option to speak to a professional.
- Limited investment choices: Most robo advisors create portfolios using ETFs and a conventional stock and bond asset mix. Some might include cash, real estate investment trusts (REITs) or cryptocurrency, but your ability to customize your portfolio might be limited. You might have access to specialty portfolios, which often offer limited customization in terms of asset allocation as well.
- No access to individual stocks: A few robo advisors offer access to individual stocks, but most don’t provide the ability to buy and sell individual investments. You normally must rely only on the pre-determined funds available from the robo advisor.
Methodology
We evaluated major robo advisor firms, focusing on areas of interest to consumers such as account fees, available portfolio options, supported accounts, automated services, customer support, account minimums and access to human advisors. Advertisers and partners don’t influence our ratings, as our research and editorial team maintains independence in using data-driven methodologies.
FAQ
Are robo advisors safe for investing?
Most robo advisors carry insurance backed by the Securities Investor Protection Corporation (SIPC), which protects your money if a brokerage fails. However, as with all investing, you still risk losses due to market conditions and poor fund performance.
Can robo advisors help with retirement planning?
Depending on the robo advisor, you might have access to financial professionals who can help with retirement planning. If you’re looking for tax-advantaged retirement accounts, most robo advisors offer IRAs.
How do robo advisors get paid?
Most robo advisors make money from fees paid by clients. Many of them use an AUM model, which charges an annual percentage based on your portfolio account balance. However, some robo advisors charge a flat monthly or annual fee. Others might not charge an advisory fee but instead make money by creating your portfolio from proprietary funds that charge expense ratios.
What are the typical fees associated with robo advisors?
Most robo advisors charge management fees for handling your portfolio and others might charge additional fees if you want access to financial advisors. It’s also common to charge a transfer fee if you move your money from one robo advisory to another.
How do you open a robo advisor account?
Most robo advisors require you to provide your legal name, Social Security number, mailing address, email address, phone number and birth date. You also usually need to acknowledge any major holdings or positions in publicly traded companies. Many robo advisors also include a questionnaire as part of their onboarding process so they can use the information to determine your portfolio construction.
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