What Is a Robo-Advisor and Is One Right for You?

These online services make it easier to get started planning for your financial goals by providing investment help at low cost and with low or no account minimums.

Arielle O'SheaOctober 19, 2020
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If you’ve ever wished for a robot to clean your house or walk your dog, you’ll likely understand the appeal of a robo-advisor. These services don’t do windows or pet-sit, but what they offer is arguably more valuable: a relatively hands-off way to invest.

How robo-advisors work

Robo-advisors — also known as automated investing services or online advisors — use computer algorithms and advanced software to build and manage your investment portfolio. Services range from automatic rebalancing to tax optimization, and require little to no human interaction — but many providers have human advisors available for questions.

Traditional portfolio management services often require high balances; robo-advisors typically have low or no minimum requirement. Because of that and their low costs, robo-advisors let you get started investing quickly — in many cases, within a matter of minutes.

» Not sure which type of advisor is right for you? Learn how to choose a financial advisor

What robo-advisors cost

Robo-advisors are much cheaper than an-person human financial advisor. Most companies charge between 0.25% and 0.50% as an annual management fee, though there are even free options like Sofi Automated Investing.

As with many other financial advisors, fees are paid as a percentage of your assets under the robo-advisor’s care. For an account balance of $10,000, you might pay as little as $25 a year. The fee typically is swept from your account, prorated and charged monthly or quarterly.

You won’t usually pay transaction fees with a robo-advisor. In a standard brokerage account, you might pay a commission to buy or sell investments, both during a rebalancing of your portfolio and when you deposit or withdraw money. Robo-advisors frequently waive these charges.

Is a robo-advisor right for you?

When considering whether a robo-advisor is right for you, take into account the following:

  1. Type of account. Most robo-advisors manage both individual retirement accounts and taxable accounts. Some also manage trusts, and a select few will help manage your 401(k).

  2. Minimum investment requirements. Some robo-advisors require $10,000 or more; among NerdWallet's recommended robo-advisors, a majority have account minimums of $500 or less.

  3. Portfolio recommendation. When signing up with a robo-advisor, your first interaction will almost always be a questionnaire, designed to assess your risk tolerance, goals and investing preferences. Robo-advisors generally 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 these questions, though you should be able to veto that recommendation if you’d prefer a different option.

  4. Investment selection. Robo-advisors largely build their portfolios out of low-cost exchange-traded funds (ETFs) and index funds, which are baskets of investments that aim to mirror the behavior of an index, like the S&P 500. You’ll pay the fees charged by those funds — called expense ratios — in addition to the robo-advisor's management fee.

» Ready to get started? Check out NerdWallet's picks of best robo-advisors

Typical robo-advisor services

The formula for many advisors is the same: automate investment management so it can be done by a computer at a lower cost. At most robo-advisors, you can expect:

  • Regular rebalancing of that portfolio, either automatically or at set intervals — for example, quarterly. Most advisors do this via computer algorithm, so your portfolio never gets out of whack from its original allocation.

  • Financial planning tools, such as retirement calculators.

  • Tax-loss harvesting and other tax-strategy offerings on taxable accounts.

If you want or need more comprehensive financial planning, or you're hesitant to leave your portfolio in the hands of a computer, you might be more interested in online financial planning services.

What are online planning services?

These companies operate as online financial advisors, and they're sort of a robo-advisor, traditional advisor hybrid: You'll receive unlimited access to a team of financial planners (or in many cases, your own dedicated financial advisor), but you'll meet virtually via phone or video rather than in-person. This model means you get human oversight and interaction at a lower cost than a traditional financial advisor.

You can expect the cost and minimum investment requirements of online financial advisors to increase with the level of human involvement, certification (such as access to a certified financial planner) and personalization:

  • Vanguard Personal Advisor Services offers access to a team of financial advisors for a $50,000 account minimum and a 0.30% fee. You'll get portfolio management and answers to your financial questions, but not a customized financial plan.

  • Charles Schwab Intelligent Portfolios Premium offers access to a team of advisors who will prepare a custom financial plan for you and manage your portfolio. Schwab requires a $25,000 account balance and charges a flat fee of $30 a month, plus a one-time planning charge of $300.

  • Facet Wealth offers each client a dedicated financial advisor and charges a flat annual fee that starts at $1,200 per year and increases based on the complexity of your planning needs. You get custom advice and a complete financial plan, and the service includes investment management.

  • Personal Capital offers dedicated financial advisors, requires a $100,000 minimum balance and charges 0.89% per year. Clients receive financial planning services and investment management. Personal Capital is currently offering NerdWallet readers two free months of advisory services.

These hybrid services can be a good option because they at least partially fill in the major gap left by strictly digital robo-advisors: Some investors want, and need, human interaction. You can view a full list of our picks for the best financial advisors here.

» Rather choose your own investments? DIY investors might prefer one of our recommended online brokers instead.

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