Robo-Advisor Frequently Asked Questions
What is a robo-advisor?
A robo-advisor is a broad category of computerized financial advisors. These money and financial managers create diversified investment portfolios influenced by sophisticated computer algorithms. The collections of investments are automated by the specific robo-advisor to fit specific investment criteria and are typically based on sound and well-respected modern portfolio management theory.
On occasion, a robo-advisor will also provide access to human financial advisors. Robo-advisors typically manage your money with lower fees than human financial advisors.
Are all robo-advisors the same?
No. There is a wide range of robo-advisors.
Here are some of the ways that robo-advisors differ:
• Types of available investments.
• Access to investment advisors.
• Minimum required initial investment amount.
• Add-on services such as rebalancing or tax loss harvesting.
• Investment strategy.
Click here for access to the comprehensive robo-advisor comparison chart.
Who benefits from using a robo-advisor?
• Someone who wants investment guidance for a low fee.
• The new investor who lacks the time or interest in managing their finances, yet wants to build wealth for the future.
• The sophisticated investor, who wants access to a financial professional, but seeks to minimize management fees.
• The DIY investor who wants part of her investments to be managed by a professional.
How is a robo-advisor different from a financial advisor?
This is how most robo-advisors work. In most cases, a robo-advisor has several pre-determined investment options. Your personal investment portfolio (within the robo-advisor platform that you choose) is typically decided after you answer several simple age and risk tolerance related questions.
In most cases, a robo-advisor platform invests in a limited number of low fee pre-selected exchange-traded or mutual funds.
Robo-advisors management fees range from free up to approximately 0.79% of assets under management (AUM).
Most robo-advisors do not help with estate planning, insurance, or tax planning.
The Human Financial Advisor
Human financial advisors may have access to a greater number of investing options. You can speak with a human financial advisor at your convenience. Their fee structure is typically higher than that of robo-advisors, although not always. Many human financial advisors offer a breadth of money, tax, insurance and estate planning guidance. As previously mentioned some robo-advisors also partner with human financial advisors.
What is an exchange-traded or mutual fund?
Most robo-advisors invest your money in exchanged-traded funds (ETFs) or mutual funds. These types of investments, group together many individual stocks or bonds into one package or fund. That way an investor can buy stocks and bonds in many different companies, by investing in just a few mutual funds or ETFs. In general, robo-advisors choose exchange-traded or mutual funds that mirror popular ‘indexes’ and charge very low management fees.
What is rebalancing?
When you create your investment portfolio, you’ll answer a few questions to determine your risk profile or how you’ll handle drops in your investment values. Then your investments are allocated by percentage into various asset groups – stocks, bonds, cash etc. in line with your risk profile. This is called your asset allocation. As stocks and bond values change, so will your asset allocation percentages. Rebalancing means selling some winners and buying more of your losers to return the investments to their original asset allocation. This keeps your investments in line with your risk profile and might increase your overall returns.
What is tax loss harvesting?
Tax loss harvesting is a strategy of selling securities that have dropped in price since purchase. This tax loss is used to offset a sale of a security that has gained in price and thus reduces taxes. Some advisors/investors replace the sold security with a similar one, 30 days after the sale, to maintain exposure to the particular asset class. (Waiting 30 days allows investors to avoid the wash sale rule which forbids the immediate purchase of the same or a similar security.)
How is Robo-Advisor Pros paid?
In some cases, this website is compensated by the specific robo-advisor when you choose to sign up for their services through the website. All information on the website is free to you, and you do not directly pay a fee to this website.
What is a robo-advisor fund’s management expense ratio?
Most robo-advisors invest your money in exchanged-traded funds or ETFs. These types of investments are managed by an outside company, not the robo-advisor itself. Generally, the fund management company, i.e. Vanguard for the Vanguard Total Stock Market ETF (VTI), receives a small fee for creating and managing the fund. These fees are quite low and don’t go to the robo-advisor. VTI charges just 0.05% of the amount invested. For more information read “What Is a Robo-Advisor Fund Management Expense Ratio?”
Are the opinions on Robo-Advisor Pros objective?
Yes. We pride ourselves in spending a lot of time investigating each of the robo-advisor firms that we cover. In many cases, our reviews include up to three separate articles. We strive to give you unbiased information about each of the various robo-advisor platforms so that you can make an educated decision.
Every review includes sections on the pros and cons of the robo-advisor. We do the heavy lifting so you can understand the features, advantages and disadvantages of each robo-advisor provider. We offer you a thorough evaluation of each robo-advisor platform through the lens of our many years of experience in the investments field. There may be more than one robo-advisor that is a good choice for your needs.
What if I have further questions?
Click on this link and email us. We will do our best to answer.