Robo-advisors are digital, algorithm-driven financial planning and investment services.
They operate with little to no human oversight and are almost completely automated. These services may simply offer advice to clients or automatically invest client assets based on that client’s financial goals, risk tolerance, and other factors.
The first robo-advisor (Betterment) was launched in 2008, but the technology that powers automatic portfolio allocation has been around since the early 2000s.
Until Betterment’s release in 2008, however, automated investing tools were only available to (human) financial advisors as tools to help them more efficiently serve clients. Today, robo-advisors have been developed to handle much more sophisticated tasks than simple portfolio allocation, things like tax-loss harvesting, investment selection, and retirement planning.
These capabilities, combined with low management fees and low portfolio minimums, have made robo-advisors tremendously popular.
The Benefits of Investment with a Robo-Advisor Service
The first—and for many the most attractive—reason to use a robo-advisor is cost. Automated investment and portfolio management services offer benefits similar to those of human advisors, but at a significantly lower price.
Another benefit of robo-advisor services is that they never sleep, and they are always working on behalf of their clients. This concept of client accessibility is baked into robo-advisor services, and it extends to account minimums as well.
Human advisors often won’t take clients with less than $100,000 to invest. Robo-advisors, on the other hand, have much lower account minimums—commonly less than $5,000, with some services requiring no account minimum at all.
What Does This Mean for Investors?
With low account minimums and easy-to-use digital interfaces, investors who previously didn’t have enough to invest with a human advisor can participate in the market with expert management at low cost.
This is particularly attractive for younger investors who are still accumulating assets to invest and are already tech-savvy. Some platforms, such as Acorns, are designed to appeal to these types of investors.
Older investors are taking to automated investment services as well. Many see robo-advisors as low-cost alternatives to human advisement when executing buy-and-hold strategies.