Meredith Dietz
Credit: Alisa Stern; Shutterstock; Quarta, Eightshot_Studio, denvitruk - In-House Art
Robo-advisors have one key purpose: to simplify the investment process. These automated digital platforms use algorithms to provide investment advice, portfolio management, and other services with little to no human intervention. But are they right for your needs? They’re the ultimate “set it and forget it” strategy for passive investors, but the lack of a real human touch could be holding you back. Here are some key pros and cons to consider when deciding if a robo-advisor is your best choice.
Pros of robo-advisors
Low fees
Being aware of the fees you pay is important to investing wisely. One of the biggest appeals of robo-advisors is that they charge far lower fees compared to human financial advisors. Fees range from about 0.25% to 0.50% of assets under management, while they may be closer to 1% for a human financial advisor.
Easy account set-up
Opening a robo-advisor account can take as little as 10 minutes online. The process is very simple compared to meeting with a traditional advisor.
Automated portfolio management
Once you complete the account-opening questionnaire, the robo-advisor will automatically invest your money and manage your portfolio according to your risk tolerances 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 perk is usually only available from human advisors charging higher fees. Here’s what else to know about using an investment loss to lower your capital-gains tax.
Goal planning
In addition to investment management, many robo-advisors help you plan for specific goals like retirement or buying a home through their app and dashboard.
Cons of robo-advisors
Account minimums
Some robo-advisors do require minimum account balances ranging from $500 to $5,000. This threshold locks out those without much starting capital.
Only basic tax management
While robo-advisors claim to personalize your portfolio, the reality is you still end up with a largely generic asset allocation. There’s little customization beyond your risk profile. I mention tax-loss harvesting above, but automated advising has limits compared to an experienced human advisor who can utilize more advanced strategies. If you want to discuss your unique situation with an advisor, robo-advisors may leave you wanting more.
Lack of complex, personal planning
Robo-advisors are designed to make investing as simple as possible. This means one of their biggest downfalls is that they often offer narrow investment options and generic portfolios, without fully taking your personal situation into account. So, robos work well for generalized goals like retirement. But they lack expertise for specialized needs like estate planning, trusts, and managing options/derivatives.
Should you choose a robo-advisor?
The choice between a robo-advisor and human advisor depends on your situation. For hands-off investing with minimal fees, a robo-advisor could suffice. They can be a great choice for newer, younger investors. But for advanced planning and strategy, a human touch may still be required for advice you can trust. The tradeoff here will be cost, but the value could be well worth it if your advisor knows what they’re doing.
If you do choose to invest in a financial advisor, you should do your own research about whose help you’re enlisting. Be sure to read up on the difference between fee-based and fee-only advisors, as certain financial advisors may not have your best interests at heart. After all, when it comes to finding the right financial planner for you, the last thing you want is to get ripped off.
Meredith Dietz
Senior Finance Writer
Meredith Dietz is Lifehacker’s Senior Finance Writer. She earned her bachelor’s degree in English and Communications from Northeastern University, where she graduated as valedictorian of her college. She grew up waitressing in her family restaurant in Wilmington, DE and worked at Hasbro Games, where she wrote rules for new games. Previously, she worked in the non-profit space as a Leadership Resident with the Harpswell Foundation in Phnom Penh, Cambodia; later, she was a travel coordinator for a study abroad program that traced the rise of fascist propaganda across Western Europe.
Since then, Meredith has been driven to make personal finance accessible and address taboos of talking openly about money, including debt, investing, and saving for retirement. Outside of finance writing, Meredith is a marathon runner and stand-up comedian who has been a regular contributor to The Onion and Reductress. Meredith lives in Brooklyn, NY.
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