Robo-advisors have made diversified, automatically managed investment portfolios accessible to more people, generally at a lower cost than traditional management. Understanding how they actually work helps you assess whether they fit your needs.
What a robo-advisor is
It's a platform that manages your investment in an automated way, using algorithms, building and maintaining a diversified portfolio (typically based on index funds or ETFs) tailored to your risk profile, without the direct, personalized involvement of a human manager in each decision.
How it determines your risk profile
When you sign up, a robo-advisor gives you a questionnaire about your time horizon, your risk tolerance, your financial goals, and your personal situation, and based on those answers assigns you a predefined model portfolio, with a mix of equities and fixed income matching that profile.
The main advantage: lower fees than traditional management
By automating much of the management process and building portfolios mainly with low-cost index funds or ETFs, robo-advisors usually offer a total fee considerably lower than that of a traditional actively managed fund or a personalized private banking service.
Automatic rebalancing as an included service
One of the standard features of these platforms is automatic portfolio rebalancing, keeping the target risk allocation in place without the user having to review or execute it manually, considerably simplifying active portfolio management for individual investors.
The limitations versus fully personalized advice
A robo-advisor offers relatively standardized model portfolios based on predefined risk profiles, without the level of personalization a human financial advisor could offer for very specific or complex circumstances (advanced tax planning, estates with particular needs).
Who it can be especially well suited for
It can be an appealing option for anyone looking to start investing in a diversified way with little initial capital, without needing to make individual asset selection decisions, and who especially values simplicity and lower fees compared with traditional active management.
Simulate the outcome of a diversified portfolio
Our compound interest calculator lets you project how your investment would evolve under different average annual return assumptions, useful as a rough reference before signing up for any automated management service.