What is a Robo Advisor?

Ah, technology. We go online to find dates, hail transportation from our smartphones and pay zero bills through the mail. Some of us even depend on Alexa to get us up in the morning. Of course, all of it changes the way we invest.

Robo advisors are automated platforms that help clients invest their savings without having to speak to an actual financial advisor. Using a series of algorithms, a robo advisor can give sophisticated investment advice for any range of clients, all without any human interaction.

How Do Robo Advisors Work?

The first iteration of robo advisors launched in 2008, just as the market was sending everyone to the exits. Betterment began as a system to increase tax efficiency in target-based funds. By automating decisions, investors kept their hands off and made fewer mistakes as a result. Betterment gained in popularity as a low-cost option for investors who wanted active management but didn’t have the huge sums needed for the top advisors. Automating the process had another effect, too: it drove down costs.

To get started, you’ll need to:

1. Visit a robo advisor website or download an app.
2. Fill out a questionnaire based on your goals, risk tolerance, and time horizons.
3. After it receives your information, the software takes over. You’ll have an investment strategy generated by computer algorithms specifically tailored to your needs.

Low-cost robo advisors are challenging traditional money managers by offering equal (or better) returns at a fraction of the price. But they’re also helping people get investment advice who otherwise couldn’t afford it.

Why Use a Robo Advisor?

There are so many pros to using a robo advisor, including:

1. Services Galore

Robo advisors help their clients determine how much money to invest to realize their financial goals in a way that is in line with their risk appetite. To that end, robo advisors help optimize asset allocation, automate tax loss harvesting, and rebalance portfolios when the market changes.

They’ll also help you plan your retirement and manage 401ks. In addition, robo advisors such as Betterment also rebalance a portfolio automatically without any additional commission cost to the client.

2. Lower Minimums

Robo advisors have a big advantage in that they have lower minimums than financial advisors, which often require their clients to invest $100,000 or more before dispensing advice. By having minimums as low as $0, robo advisors dispense previously unaffordable retirement planning and portfolio balancing advice to a broader selection of people.

3. Lower Fees 

Robo advisors generally cost 0.25%-0.5% of the portfolio, versus a financial advisor that generally charges 1-2%. Over time, the lower fees add up and give users of robo advisors a greater share of investment gains, which could amount to hundreds of thousands of dollars for many individuals. Robo advisors rates don’t necessarily include ETF mutual fund fees.

4. Fewer Conflicts of Interest

Often, the interest of financial advisors doesn’t necessarily match the interest of their clients. A financial adviser might make more money, for example, if he steers his client into high-fee products, and with a robo advisor, that’s obviously not a problem.

For example, StreetBeat uses AI technology to connect investors with stocks, ETFs and crypto, using generative AI that builds unique strategies for the individual account holder. You can learn more here:

5. Tax-Loss Harvesting

Robo advisors also offer clients an advanced feature, tax loss harvesting, which is the practice of divesting a security at a loss, i.e. harvesting, to offset gains elsewhere in a portfolio. The divested security is then replaced by a similar security, helping a client maintain the optimal asset allocation by keeping a portfolio’s diversification. The realized losses on divestments could also potentially reduce an investor’s ordinary taxable income by as much as $3,000.

6. Hybrid Robo Advisors

For certain people, robo advisors are just not enough, and they require more of a hands-on human touch. To solve that problem, many financial firms offer hybrid robo advisors or robo advisors with the added functionality of talking with regular human financial advisers through the phone. Those financial advisers could potentially help clients with complex things such as estate planning, etc. that robo advisors currently don’t do.

Picking a Top Robo Advisor

Betterment isn’t the player in the market anymore. Competing firms are ramping up the pressure and even traditional giants like Vanguard and Charles Schwab are formulating their own robo-advisors.

Need help picking the best robo advisor for you? Check out Benzinga's Best Robo Advisors. If you don't have time to go through the list, take a peek at our quick picks below.

Final Thoughts on Robo Advisors

There's an undeniable truth to using a robo advisor: it'll be accessible no matter what (as long as you have an internet connection.) Financial advisors require fitting an appointment into their busy schedule.

On the downside, you miss out on the human element and conversation with an advisor if you use a robo advisor, so only you can determine what's best for you and your financial future.