What Is a Robo Advisor, and Do I Need One? (2024)

Say you have a few hundred or a few thousand dollars to invest, and you’re busy or just not comfortable overseeing those sums by yourself. You could try to hire a financial advisor, but few advisors want to manage portfolios under $500,000 or more and cost thousands of dollars a year. That’s where a robo advisor can help.

A robo advisor is a digital, automated service that makes investing easy because it picks securities for you. This convenience, along with robos’ typically low fees, are a big reason these services, which first began appearing about 15 years ago, have been surging in popularity.

“If you are someone who doesn’t have the time, interest or expertise to manage your own investments, these are a compelling value proposition,” says Mike Foy, head of wealth intelligence at J.D. Power and author of the company’s recent U.S. Digital Advice Special Report.

If you are looking for a simple, hands-off way to grow your wealth—perhaps for a down payment on a house, a future college education or retirement—then a robo like Betterment or Wealthfront, both among Buy Side from WSJ’s picks for Best Robo Advisor, could be a good option.

How to start investing with a robo advisor

Getting started investing with a robo advisor is designed to be easy. Most allow you to sign up from your computer or phone in a matter of minutes. While all robo advisors work a little bit differently, here are the basic steps you will go through to get started.

Pick the right robo for you

Before you actually open an account with a robo advisor, you want to make sure you’re choosing the platform that’s best for you—and there are many to choose from. Pay attention to the fees when comparing robo advisors, as well whether they offer tax-loss harvesting and a premium service that includes human advice, if that’s something you’re interested in.

Betterment was our pick for best overall robo, thanks in part to its zero-minimum, pragmatic investing approach. New investors may want to opt for Fidelity Go, which requires just $10 to start investing and is free for the first $25,000 you invest. If you’re investing for a variety of reasons—like retirement, a down payment and a future wedding—another great option is Wealthfront, which lets investors plan for various investing goals and comes with an extensive list of investment options with some ability to customize choices.

Choose an account type

To open an account, you’ll need to sign up at the robo’s website. Depending on the robo advisor you’ll first have to indicate whether you want to open a taxable account or a retirement account such as a traditional IRA or Roth IRA. A taxable account allows you the most flexibility because you can withdraw your money any time for any reason, but if you receive dividends or realize capital gains, you may end up with a tax bill.

Traditional IRAs and Roth IRAs offer attractive tax benefits: Money in a traditional IRA grows tax-deferred so you won’t pay taxes on any gains or interest until you withdraw your savings in retirement, while Roth IRAs allow you to contribute after-tax money and make tax-free withdrawals later in life. But both of these retirement accounts come with contribution limits and restrictions on how and when you can withdraw your earnings.

Answer questions about what kind of investor you are

In addition to choosing an account, you’ll also be asked to provide information about your financial situation, goals and risk tolerance. The risk tolerance questionnaire is key, since it will go a long way to determining what investments the robo chooses for you. Wealthfront, for example, will ask what you would do if your portfolio lost 10% of its value in a month: sell some or all of it, do nothing or buy more? Fidelity Go asks initially to rate your risk tolerance on a scale of 1 to 10, from least to most.

Be honest in your answers, since fibbing will only hurt yourself. “You could shortchange yourself on the long-term growth or your portfolio,” says David Goldstone, editor of The Robo Report, published by Condor Capital.

Robos that offer multiple portfolio types—not all do—-will also ask you to choose one. Betterment, for example, has seven different portfolios, including a core, smart beta and target income portfolio, three “socially responsible” plans, plus a cash reserve.

The core portfolio is made up of exchange-traded funds, or ETFs, and is designed for long-term returns and low costs, while the smart beta portfolio invests more heavily in companies with higher growth potential (and more risk). The target income portfolio, meanwhile, is made up of 100% bonds.

Get paired with the right stock and bond mix

With all the information you’ve provided the robo advisor will propose a portfolio that matches your profile. It will usually consist of a mix of stock and bond ETFs, but some robos, notably Fidelity’s Fidelity Go service, use portfolios of index mutual funds. ETFs and mutual funds are baskets of securities, but ETFs, unlike mutual funds can be traded throughout the trading day and tend to be more tax-efficient.

Robo portfolios range in terms of their risk and potential for growth. A conservative portfolio will include more fixed-income and sometimes cash. These assets are less volatile than stocks, but offer less potential for growth. An aggressive portfolio will include more stocks, and take on more risk. A moderate portfolio falls somewhere in the middle.

Your portfolio makeup will be determined by your goals and how much risk you’re willing to take on. For instance, an investor in their thirties with at least three decades until retirement may have an aggressive portfolio made up of 80% stocks and 20% bonds and cash. On the other hand, a retiree will likely have a more conservative portfolio, perhaps with just 20% in stocks and 80% in bonds and cash. Ally Invest even offers a conservative portfolio that’s 30% cash as “a buffer against market volatility.”

“Not everyone is equally comfortable with market volatility” says Foy. Robos can “help create a portfolio you are comfortable with.”

(To be clear, robo advisors don’t protect you from market fluctuations; you can still lose money if the stock or fund you invest in tanks after you buy it, and you choose to sell. However, if the robo-advisor itself were to fail, your investments up to $500,000 would be protected by the Securities Investor Protection Corp, an organization similar to the Federal Deposit Insurance Corp.)

Fund your account

If you agree with the robo’s investment approach, you’ll need to fund the account with money from a checking or savings account or a rollover from another investment account, but the latter is a more complicated way to go.

Typically, the robo advisor will notify your current brokerage firm that you’d like to move your money, and then the brokerage firm will review the request and transfer the investment and cash (which can take around five to 10 business days). Some of your investments may be sold during this process, which could result in capital gains taxes.

For example, Betterment says that investments will stay invested throughout the process, but then ETFs and mutual funds that don’t align with the robo’s portfolio strategy are usually sold.

You may have to pay a fee for the transfer depending on if the brokerage firm charges one, even if the robo doesn’t. Some robos, like Vanguard’s premium Personal Advisor Services, which provides access to a human advisor, offer a more comprehensive service that can help minimize the tax consequences of rollover transfers but, of course, you’ll pay more for a premium robo account than the plain vanilla variety.

Who Are Robo Advisors Good For?

If you want to invest but don’t want to manage a portfolio yourself and don’t want to pay to hire a financial advisor, a robo advisor may be a good option for you. While you’ll have to put in some initial work to ensure that the robo picks a portfolio that matches your goals you can usually maintain a set-it-and-forget-it approach. Robo advisors will often allow you to set up automatic deposits from your bank accounts, meaning you won’t have to think about consistently adding to your portfolio.

Some robos offer human advice for an extra charge or allow you to customize the automated portfolios, which may make sense if you want to be involved in the process but not have to rebalance or choose investments on your own. Either way, you’re still mostly working with a robot, which means you need to be comfortable managing your money online.

Many robo advisors offer more than investing accounts. Betterment and Wealthfront, for example, offer cash reserve accounts, which pay substantially more than traditional bank savings accounts and about the same amount as many of the best high-yield savings accounts.

They also offer checking features and debit cards. Wealthfront has a 529 savings account, which is a tax-advantaged way to save for a college education or private K-12 education; SoFi offers mortgages and student loans, the latter being its initial business. If you’re looking for a bit more than just portfolio management, you may want to consider a robo with these extra offerings.

How Much Do Robo Advisors Cost?

Robo advisors charge less actual financial advisors, which is part of their appeal. Here are the details.

Robo fees

Several learning robos charge an average of about $25 annually for every $10,000 invested excluding the fees charged by the funds in which they’re invested. Compare that to the industry standard $100 fee human advisors charge on the same amount, and you’ll see why robos can be a more affordable option.

Robo minimum requirements

Some robos require you to open your account with a minimum investment, while others have no or low opening minimums.

Acorns, Betterment and Fidelity Go, for example, have no minimum to open an account but Acorns requires $5 to start investing and Betterment and Fidelity call for $10. Wealthfront, which has a broad range of portfolios, requires just $500 for its classic and “socially responsible portfolios” but $100,000 minimum for more complex direct indexing and risk parity portfolios.

Cost of extra robo services

If you want more than the basic robo advisor services, you’ll likely have to pay for it. Some robos charge extra for add-on features or premium accounts that typically have higher minimum balance requirements. Vanguard, for example, has a premium service with a $50,000 minimum balance requirement that combines digital investment offerings with the expertise of human advisors for a 0.3% fee. Betterment meanwhile offers financial planning sessions with a human advisor for an additional fee of $299 to $399, depending on the type of guidance you want.

Alternatives to Robo-Advisors

Robo advisors are a relatively inexpensive way for investors to save for any number of financial goals but there are alternatives, including:

Target-date funds: The primary goal of these funds is retirement. They invest in a mix of stocks, bonds and cash and gradually move towards more bonds and cash as they approach their target date. Unlike with robo advisors, you don’t fill out a questionnaire with a target-date fund; instead, you pick the year you plan to retire.

These funds are also pretty set in stone, meaning you can’t customize based on your preferences. There are low-fee target-date funds from asset managers like Vanguard and BlackRock but some charge annual fees closer to 0.5%, which is more expensive than many robos, even after accounting for the robo’s management fee plus the fees for funds in which the account is invested.

Dedicated financial advisor: Some people will always feel more comfortable working with an actual human instead of a robot. Meeting 1:1 with an individual financial advisor means you will likely come out with a more customized investment portfolio than a robo advisor could provide and help with withdrawing your funds when the time comes.

A financial advisor can also help with managing the tax consequences of savings and withdrawals, inheritances and provide other services, but the annual cost will run around 1% of an investor’s assets. Also, many advisors will not handle accounts that have less than $500,000 or more.

Do-it-yourself: This is an option that’s always available for investors especially since trading fees are extremely low as are the net expense fees for ETFs and mutual funds. D.I.Y.ing may be a better option if you’re comfortable investing in either individual stocks or bonds or funds and have the time and interest to follow financial markets and the securities you purchase. It’s a riskier move if you’re not and as you face more complex problems like minimizing your tax hit when you make withdrawals or figuring out how to make your money last through retirement.

“Having access to low-cost advice can help investors avoid making mistakes that are difficult to recover from,” such as overpaying for investments or spending at a rate that isn’t sustainable, says Amy Arnott, portfolio strategist at Morningstar and lead author of its 2022 Robo-Advisor Landscape report.