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:
- 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).
- 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.
- 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.
- 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.
- 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.
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.
