A robo-advisor is a low-cost, online investing platform that employs software algorithms to create and manage investment portfolios. While financial professionals typically design the investing strategies employed by robo-advisors, the ongoing day-to-day management of the portfolios is handled by computers.
Traditional investment management companies and many financial advisors require their clients to maintain substantial account balances, and they tend to charge high annual management fees. Most robo-advisors have low or no minimum balance requirements and charge more affordable annual fees.
Robo-advisor services include automatic asset allocation, portfolio rebalancing and tax optimization. Many provide access to human financial advisors to help clients with investment planning.
Since they run automatically and are accessible online, robo-advisors can help you get started investing very quickly, often in a matter of minutes. They can help you take the emotion out of investing decisions, using proven strategies that are tailored to each user’s risk tolerance and financial goals.
How Do Robo-Advisors Work?
The robo-advisor experience usually begins with a brief questionnaire. A new user answers questions related to their age, income, investment goals and risk tolerance. Goals can be anything from saving for college expenses or a home down payment, to investing for retirement.
With this information in hand, the robo‑advisor builds the new user a diversified portfolio of ETFs or index funds from a limited menu of options selected by investment professionals. The choice of funds matches the goals and risk tolerance outlined in the questionnaire.
Once a user’s portfolio is set up, the platform’s software maintains the correct asset allocation in the portfolio, rebalancing holdings as needed so you don’t have to. Tools and visualizations are provided to let users track their progress, add contributions and potentially set up new goals.
What Are Hybrid Robo-Advisors?
Hybrid robo-advisors combine the benefits of human advisors and automated investment management.
They aim to provide the best of both worlds by combining the personalized advice and guidance of live advisors with the automated algorithms of robo-advisors. They typically use technology to streamline portfolio management and create efficiencies, while also providing access to human advisors for personalized advice, financial planning and other services.
Hybrid robo-advisors may be a good fit for investors who want the low fees and ease-of-use but also want the personalized advice and guidance of human advisors. They may also be a good option for investors with more complex financial situations or higher investment amounts who need more personalized attention.
Are Robo-Advisors Safe?
Robo-advisors are as safe as traditional investment services. All investing carries risks. You could choose bad investments and lose your money. Robo-advisors, like traditional advisors, encourage customers to mitigate risks through diversification.
Cybersecurity is also a risk with robo-advisors or any other online investing, but most reputable companies employ state-of-the-art encryption technology and other security measures to protect your accounts.
