When to Use a Robo-Advisor (and When to Avoid It)

Robo-advisors have one key goal: to simplify the investment process. These automated digital platforms use algorithms to provide investment advice, portfolio management and other services with little or no human intervention. But are they suitable for your needs? This is the ideal set-it-and-forget-it strategy for passive investors, but the lack of a real human touch may be holding you back. Here are some key pros and cons to consider when deciding whether a robo-advisor is your best choice.

Pros of robo advisors

Low commissions

Knowing the fees you pay is important to investing wisely. One of the biggest attractions of robo advisors is that they charge much lower fees compared to human financial advisors. Fees range from 0.25% to 0.50% of assets under management, whereas for a financial advisor they can be closer to 1% .

Easy account setup

Opening a robo advisor account can take as little as 10 minutes online. The process is very simple compared to meeting with a traditional consultant.

Automated portfolio management

Once you complete the account opening application, the robo-advisor will automatically invest your money and manage your portfolio based on your risk tolerance and goals. This hands-off approach is convenient for many.

Tax Loss Harvesting

Many robo-advisors offer automated tax loss harvesting, selling off underperforming assets to offset capital gains and save on taxes. This bonus is usually only available from human advisors who charge higher fees. Here’s what else you need to know about using investment losses to reduce your capital gains taxes.

Planning goals

In addition to managing investments, many robo-advisors help you plan for specific goals, such as retirement or buying a home, through their app and dashboard.

Cons of robo advisors

Account Minimums

Some robo advisors require a minimum account balance ranging from $500 to $5,000. This threshold blocks those who do not have large starting capital.

Basic tax management only

Although robo-advisors claim to personalize your portfolio, in reality you are still mostly getting a general asset allocation. Beyond your risk profile, there is a bit of customization. I mentioned tax loss harvesting above, but automated advice has limitations compared to an experienced human advisor who can use more advanced strategies. If you want to discuss your unique situation with an advisor, robo-advisors may leave you wanting more.

No complex personal planning

Robo-advisors are designed to make investing as easy as possible. This means that one of their biggest drawbacks is that they often offer narrow investment options and general portfolios without fully taking your personal situation into account. Thus, robots work well for achieving common goals such as retirement. But they lack the expertise to handle specialized tasks such as estate planning, trusts and options/derivatives management.

Should you choose a robo advisor?

Choosing between a robo advisor and a human advisor depends on your situation. For automated investing with minimal fees, a robo-advisor may be all you need. They can be a great choice for new, younger investors. But more detailed planning and strategy development may still require human input and advice you can trust. The trade-off here will be cost, but the value can be worth it if your consultant knows what they’re doing.

If you do decide to invest in a financial advisor, you should do your own research about whose help you are enlisting. Be sure to familiarize yourself with the difference between fee-based and fee-only advisors , as some financial advisors may not have your best interests at heart. After all, when it comes to finding the right financial planner, the last thing you want is to get scammed .