What is a robo-advisor? How they work & when to use one

Robots and computer algorithms have pervaded many areas of people’s lives, often making processes faster and chores effortless. They can vacuum your home, order groceries they sense you’re running out of, and drive you to work.

In the last several years, computer algorithms have been managing and investing people’s money.

How do robo-advisors work?

These programs are called robo-advisors, automated investing services that use software and algorithms to make investment decisions. They require little to no human interaction.

Though every firm’s process differs, users typically fill out an online questionnaire to assess risk tolerance and investment needs. The robo-advisor then builds a portfolio of funds that are selected by the firm’s investment professionals. The robo-advisor also rebalances your portfolio by periodically buying or selling assets to maintain the desired asset allocation or risk.

Robo-advisors are a potential option for beginning investors who lack financial knowledge, but may not have enough assets to work with a professional. Busy individuals who don’t have the time to actively manage their money may also benefit from a robo-advisor.

One of the benefits of robo-advisors is the ability to invest while minimizing the risk of making mistakes that investors often make when managing their own money. In many cases, the computer makes the decisions once you indicate your investment goals and risk tolerance.

Robo-advisors require little to no minimum investment and charge low fees. Management fees the firm charges typically run between 0.25 to 0.50 percent annually of the invested assets, or $25 to $50 for every $10,000 invested.

The potential downside is that you don’t have access to actual human advice on investing unless your pay an extra fee and/or provide a higher initial investment. Also, robo-advisors offer broader investment strategies than the custom plans you would receive from a human advisor. As your life and goals change, so will your investment needs, and robo-advisors may not be sufficient to deal with major life changes.

Best robo-advisors in 2020

Ally Invest

Ally Invest offers two investing options: self-directed trading and managed portfolios that are similar to robo-advisors. The managed portfolio enables you to invest in Exchange Traded Funds (ETFs) for a minimal investment of $100. The program will set aside 30 percent of your portfolio as an interest-earning cash buffer. You can choose from socially responsible, tax-optimized, and dividend-paying portfolios.

Betterment

Betterment offers a Digital Plan with an annual fee of 0.25 percent of your account balance. There is no minimum balance required and its comes with globally diversified portfolios, automatic rebalancing and tax-saving strategies. Its Premium plan costs 0.40 percent and requires a $100,000 minimum balance. It includes unlimited calls to the company’s certified financial planners.

Charles Schwab

Charles Schwab’s Intelligent Portfolios enable investor to invest in a portfolio of ETFs. There are no advisory fees, but there is a minimum balance of $5,000. The company’s service includes rebalancing, automatic tax-loss harvesting, and 24/7 customer service.

Ellevest

Ellevest is an investing serviced geared to women. Its basic service, which has no minimum balance and charges a 0.25 percent fee, offers automatic rebalancing and tax minimization. A premium services is available for a minimum balance of $50,000 and 0.5 percent fee. It includes access to certified financial planners.

SoFi Invest

The well-known online lender now has a robo-advisor service. SoFi provides automatic rebalancing and goal-based planning. Plus, you’ll get career services, access to financial advisers and discounts on other SoFi products for no extra cost. There is no management fee or minimum account balance.

Wealthfront

Wealthfront is one of the largest robo-advisors in the U.S. Wealthfront offers index funds to invest in, for an annual fee of 0.25 percent on what you invest. The company offers free financial planning and its software offers tax-loss harvesting. The minimum balance is $500.

Wealthsimple

Wealthsimple says it can invest money across the entire stock market using ETFs. Services include automatic deposits, dividend reinvesting, automatic rebalancing, and a mobile app. There is no minimal investment, but a higher annual fee (0.5 percent vs 0.4 percent) for accounts less than $100,000.

Are there insurance robo-advisors?

Naturally, robo-advisors are beginning to enter the insurance field. They work in much the same way, but collecting information about a prospect and processing it through an algorithm to determine a user’s insurance needs. Although they won’t completely replace traditional insurance agents, they will become more prominent as automation helps insurers reduce their cost. Robo-advisors can also help insurers provide faster customer service.

Robo-advisors can be used for policy price comparison, purchase and service, and claims management.


Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

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