What is a Robo Advisor?

Investing can be time-consuming if you take the DIY approach, but if you want to be less involved, robo advisors can help streamline the process. Robo advisors are automated investing services that take the place of, or work with, a human financial advisor to manage an investment portfolio. It's easy to get started with a relatively small amount of money, and you'll typically pay less in fees.

What is a robo advisor? 

A robo advisor is a service that provides automated financial and investment services, with limited human intervention. Robo advisors are typically used with brokerage accounts or retirement plan accounts. Some of their services include investing funds in the stock market, managing portfolios and harvesting tax losses. Using algorithms, a robo advisor can tailor its actions based on an investor's risk tolerance and investment goals. 

Some robo advisors offer access to human financial advisors, while others just offer automated services. Because they rely on automation rather than the time and expertise of human advisors, robo advisors can provide investment services at a much lower price. 

How do robo advisors work? 

When you open an account with a robo advisor, you usually start by completing a basic questionnaire. You'll answer questions about your investing goals, income, financial obligations and willingness to take on risk.  

A robo advisor uses your answers to create an investor profile, which guides your investments and portfolio management over time. If your answers show that you don't plan to withdraw from your investment account for 30 years, for instance, the algorithm will probably select a more aggressive portfolio for you. But if you have a lower risk tolerance — say, you hope to use the funds within the next few years — the robo advisor will select a more conservative or moderate portfolio for you. 

4 benefits of robo advisors

Robo advisors offer a number of benefits for investors compared to working with human financial advisors. Some of the biggest benefits include: 

1. Automatic portfolio rebalancing 

A diversified portfolio allows investors to reduce risk while participating in various investment sectors. The best way to allocate your portfolio across various investment classes depends on your individual goals and risk tolerance. Over time, as the market fluctuates, your intended asset allocation, or what proportion of your portfolio's total value is invested in specific types of assets, will gradually change in balance. 

For example, say you invest 60% of your portfolio in the stock market and 40% in bonds. When the stock market experiences rapid growth, returns on your stocks may grow much more quickly than returns on your bonds. To maintain your intended investment allocations, it's important to periodically rebalance your investment portfolio.

With a robo advisor, the process of portfolio rebalancing is automatic. The algorithm regularly facilitates trades or reallocates investments to move your portfolio back to its intended mix.

2. Lower cost 

Compared to working with a human advisor, robo advisors are usually the cheaper option. Human advisors typically set expense ratios at around 1% to 2% of your assets under management. In contrast, robo advisors typically charge about 0.5%, or even a flat subscription fee. Robo advisors also won't set hourly rates or charge other costs that human advisors might pass on to you, such as advising or management fees. Keep in mind that underlying investments have separate fees and expenses.

3. Easily accessible 

In addition to the lower cost, accessibility via an internet connection means that robo advisors are more accessible to a wider number of people. An account can be opened with a robo-advisor on a smartphone, tablet or other internet-connected device. Once the account is open, the device can be used to invest funds, check balances and review investment earnings. Using a robo advisor can simplify the process of investing and make it easier and less stressful. 

4. Lower investment minimums

Many traditional advisors require an account minimum. For example, they may only accept clients who have investable assets of $100,000 or more. 

However, many robo advisors either don't set a minimum balance requirement or put it very low. As a result, robo advisors make it easy for beginners to start investing without having to make all their investment decisions on their own. With a robo advisor, you can start with smaller investments while still benefiting from outside help with asset allocation, investment selection and portfolio rebalancing.  

Are robo advisors worth it? 

A robo advisor can be a good option — especially for new investors — because they're easy to use, offer low fees and typically set a low account minimum (if any). Robo advisors also use proven investment strategies, so you reap the benefits without putting a lot of time or money into the process. And because everything is automated, your portfolio will automatically and continually be optimized, rebalanced and invested.

Using Acorns as a robo advisor

A robo advisor should make investing easy and automatic, especially for those new to the process. Opening a robo advisor account is easy. An Acorns account takes just minutes to set up and launch an investment portfolio that matches your financial goals. You can start investing with small amounts, like your spare change. 

Recurring investments, portfolio rebalancing and dividend reinvestment can all be automated to keep your portfolio working towards your investing goals. That can make it easy to fund your investment account and save for retirement, your kids' future, an emergency fund or for other future goals.  

If you're ready to learn more about robo investors and start funding your own automated investment account, check out Acorns Invest.