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

These online services make it easier to get started toward your financial goals by providing investment help at low cost and with low or no account minimums.
July 22, 2019
Advisors, Investing
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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 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.

Because they offer low costs and low or no minimums, robos let you get started quickly — in many cases, within a matter of minutes.

» Debating between a human and robo? Learn how to choose an advisor

What robo-advisors cost

Robo-advisors are much cheaper than a human financial advisor. Most companies charge between 0.25% and 0.89% as an annual management fee, though most are 0.5% or less. These 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.

» Read more: How much does a financial advisor cost?

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 picks of the best 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. Time until retirement. If your goal is retirement in five years or buying a house in three, you’ll be directed toward the conservative end of the spectrum, with a portfolio heavily weighted toward bonds and even cash. If retirement is in 30 years, the advisor will direct you toward a more aggressive portfolio lined with stocks. You can also have multiple accounts — say, a taxable account for your 10-year-anniversary cruise and a retirement account — with a different portfolio allocation for each.
  5. Fund 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 services so they 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

There are also hybrid services: Computer algorithms run in the background but clients have access to human financial advisors, either on an unlimited basis or via a set number of phone calls throughout the year.

You can expect the cost and minimum investment requirements of these services to increase with the level of human involvement. Personal Capital offers dedicated financial advisors, requires a $100,000 initial deposit and charges 0.89% per year. Vanguard Personal Advisor Services and Charles Schwab Intelligent Portfolios Premium both offer access to a rotating cast of advisors for a lower minimum deposit and fee. Vanguard requires a $50,000 minimum and charges 0.30% per year; Schwab requires $25,000 and charges a flat fee of $30 a month, plus a one-time planning charge of $300.

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.

» Rather choose your own investments? See our best online stock brokerages

» Read why robo-advisor performance is just one piece of the puzzle.

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