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.
» 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 recommended 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.
- 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.
