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Automating your investment decisions with a <anchor>robo-advisor</anchor>, especially your first year in the market, can remove the decision-making pressures that lead to impulsive stock selection decisions.
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# What is a robo-advisor and how do you open an account?

By

Rocco Pendola

CNN Underscored Money

Published 7:48 AM EDT, Tue April 30, 2024

Featured Image

Ivan Bajic/iStock

If you don’t like algorithms that help decide which article to read, TV show to stream or song to listen to next or the ones that use your online activity to serve relevant — and, sometimes, annoyingly irrelevant — online ads, you might feel uncomfortable letting computer software determine where to invest your money.

This is what a robo-advisor does. It uses algorithms, based on artificial intelligence (AI) and machine learning, to design and even maintain your investment portfolio for you. Typically less expensive than a personal financial advisor, automated investing doesn’t completely take the power out of your hands. It just streamlines the process for a wide range of investors.

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## Introduction to robo-advisors

Think of robo-advisors as a cross between do-it-yourself investing and hiring a human financial advisor or wealth manager.

Answer a series of questions about your investing goals, timeline and risk tolerance, and your robo-advisor guides you through the investment process and crafts a portfolio, usually with pooled investments like exchange-traded funds (ETFs) that track a market index or sector. Some robo-advisors regularly check on your investments, altering them as necessary. Others offer access to a human financial professional, generally for an additional fee.

## Growth of robo-advisers

In 2024, investors are expected to keep more than $1.8 trillion in robo-advisor accounts worldwide, according to data from Statista Market Insights. Assets under management (AUM) are expected to increase to roughly $2.3 trillion among 34 million users by year-end 2027.

Statista further projects that robo-advisor AUM in the United States will reach approximately $1.5 trillion in 2024. By 2027, this number is expected to jump to just north of $1.8 trillion, spread across 21.1 million users.

Accounting firm PricewaterhouseCoopers (PwC) is even more bullish. In a July 2023 report, PwC projects global robo-advisory AUM to hit a whopping $5.9 trillion by 2027, more than double their 2022 figure of $2.5 trillion. Thanks in part to this growth in automated investing, PwC thinks 16% of wealth management firms will either have gone out of business or consolidated by 2027.

## How to open a robo-advisor account

Similar to a regular brokerage account, investors can open a robo-advisor account in a few easy steps:

1. Determine how involved you want to be: If you’re a do-it-yourself investor who feels comfortable picking stocks and ETFs for your portfolio, you may decide that you don’t want or need a robo-advisor. But if you could use help building and managing a diversified portfolio, going with a robo-advisor is typically the easiest option.
2. Choose a robo-advisor: Once you’ve decided to invest with a robo-advisor, choose what firm you want to do business with. These days, many major brokerage firms, such as Fidelity and Charles Schwab, offer automated investing platforms. But there are also online-only platforms, like Betterment, that provide robo-advisor services.
3. Take the survey: After you’ve chosen a robo-advisor, begin the account opening process by submitting the necessary personal and financial information. As part of this process, robo-advisors will ask you to answer a series of questions about your financial situation and investing preferences, which it will use to build your portfolio. Make sure your answers are as accurate as possible in order to get the results that are most applicable to you.
4. Monitor your account: When it’s time to start investing, you’ll need to link your bank account and make a deposit to the robo-advisor account. Some robo-advisors have account minimums, so do your research beforehand. The robo-advisor will then allocate your funds between a series of diversified investments. You shouldn’t need to check on your account often, but be aware of what you’re invested in and make changes as necessary.

## Robo-advisors versus traditional investing

While you might seek guidance from family, friends, co-workers, your tax accountant or HR department, you’re largely left to conduct your own research and make your own investment decisions. Your previous experience and comfort level with stocks, bonds, ETFs, mutual funds (another type of pooled investment vehicle overseen by professional investment managers) and other investments often dictate the specific path you take and subsequent results.

Robo-advisors ask basic questions about your financial situation and investment-related expectations and concerns. Then, they create a suitable slate of investments to address your situation.

## Robo-advisors versus financial advisors

If you want nothing to do with do-it-yourself investing — due to lack of time, experience, comfort, a complex situation or merely the desire to consult an expert — you might go with a financial advisor.

Financial advisors tend to give clients more personal service than robo-advisors. A good financial advisor won’t simply ask a handful of questions and put you into the exact same ETF portfolio as aggregate sets of other clients. Rather, they’ll dig deeper into the specifics of your situation and tailor a more comprehensive portfolio to your unique circumstances. They might also help with other areas of personal finance, such as tax and estate planning.

Generally, financial advisors have larger balance requirements and higher fees than robo-advisors.

## Modern portfolio theory and robo-advising

While AI and advanced algorithms have helped make automated investing more sophisticated, many robo-advisors use modern portfolio theory to build their approach.

Originated in 1952 by Nobel Prize winner Harry Markowitz, modern portfolio theory seeks the maximum return at a given level of risk. Instead of viewing investments in isolation — as high risk/high reward or low risk/low reward — Markowitz argued that investors should consider their entire portfolio, selecting a mix of high- and low-risk investments that are not all correlated. Ideally, you want to own assets that do not all move in the same direction, weighing them “according to their connection to each other.”

This type of diversification is essentially what robo-advisors generate after you answer the algorithm’s questions.

For example, when we tested Charles Schwab’s robo-advisory service — Intelligent Portfolios — it allocated 79% of our portfolio to stocks, 11.7% to fixed income, 7.3% to cash and 2% to commodities across 17 asset areas. Within the stock category, Schwab had us in 12 different spaces, including domestic and global funds containing large companies, small companies, real estate and other types of stocks. Schwab uses 51 different ETFs to help achieve diversified, automated portfolios.

While not all robo-advisory is directly tied to modern portfolio theory (most robo-advisors don’t reveal their exact method), the overarching goal — diversification — remains the same.

## Robo-advisor fees and account minimums

As with most investing platforms and products, robo-advisor fees and account minimums vary.

### Management fees

Pay attention to management or advisory fees. While some firms do not charge this fee, many do. Based on our survey of the landscape, these fees typically range from 0.15% to 0.50%. Some robo-advisors go the subscription route, charging monthly or annually for their services. For example, Betterment, a pioneer in the space, charges $4 a month. However, it switches to a 0.25% annual fee if you keep $20,000 or more in Betterment accounts or agree to automatic monthly deposits of $250 or more.

### Expense ratios

Even if a robo-advisor advertises no management fee, you will likely pay the expense ratios charged by the ETFs included in your portfolio. You’ll generally find the lowest expense ratios at big fund firms such as Vanguard, where the average ETF expense ratio is just 0.05%. At Betterment, expense ratios range from 0.05% to as high as 0.21% depending on the automated portfolio and its investment weighting, while robo-advisor SoFi’s proprietary ETFs carry an average expense ratio of 0.40%. It’s important to note that many robo-advisors, such as Betterment, use ETFs from large fund families, including Vanguard, to populate their automated portfolios.

### Account minimums

Account minimums also vary across robo-advisors, typically ranging from $0 to a few hundred dollars, with some firms charging as much as $5,000 or more.

## Features found in robo-advisors

In addition to automated portfolios, most robo-advisors offer additional services.

### Portfolio rebalancing

As the value of your investments fluctuates, so will the ideal asset allocations for your portfolio. Most robo-advisors automatically rebalance your portfolio as needed or on a set schedule at no additional charge. Betterment, for example, rebalances when the allocation in your main asset classes drifts, or deviates, from its target by a certain amount. Some firms require a minimum portfolio value for rebalancing.

### Tax-loss harvesting

Tax-loss harvesting involves selling investments that are down for a loss, then using that loss to help offset capital gains taxes triggered by profits you realized on winning investments you sold. Some robo-advisors, such as Betterment and Wealthfront, tax-loss harvest at no additional charge, while others charge a fee or require a minimum balance to activate this feature.

### One-on-one advice

Some robo-advisors offer plans or add-ons where you can have access to a human financial advisor. SoFi provides this perk for free, but most robo-advisors either charge additional fees or require larger minimum balances.

## Is a robo-advisor right for you?

This is a classic case of one size definitely doesn’t fit all.

If you’re a beginner, robo-advisory might be the best route because you can hand off the often complicated task of investing and pay relatively low fees. If you’re a more experienced investor, you might go with a robo-advisor for the same reasons, with added confidence due to a better understanding of how automated investing works.

Regardless of your experience and comfort level, some situations require a personal touch or modifications that go beyond current robo-advisor capabilities. Even the most sophisticated series of questions might not lead to the ideal portfolio for you if you have a multi-faceted financial picture. Maybe you own real estate, recently inherited wealth or are going through a divorce. In these and other cases, you might be better off taking the DIY route or consulting a financial professional.

## Frequently asked questions (FAQs)

Are robo-advisors suitable for beginners?

Recent research on the millennial cohort of investors indicates that the more financial knowledge an individual possesses, the more likely they are to use a robo-advisor. That said, robo-advisors take much of the guesswork out of investing, making them ideal for beginners who desire what amounts to a guided tour through an ultimately hands-off investment process.

Can robo-advisors handle complex portfolios?

As noted, if your financial planning includes elements beyond getting yourself into relatively straightforward long-term investments, such as stock market index-tracking ETFs, your overall situation might warrant more nuance and personal touch than robo-advisors can provide. Your answer to this question — and how you define “complex” — will likely vary from the investor sitting next to you based on how many money-related balls you have in the air.

How often can I adjust my robo-advisor settings?

While most robo-advisors automatically monitor and rebalance your portfolio as needed or on a periodic schedule, you can generally go into your account and make changes whenever you want. In this respect, robo-advisory is like any other type of investment account where you can adjust your investments as your sentiment and situation dictate.

What are the benefits of using a robo-advisor?

For starters, robo-advisors help take the guesswork out of investing. Based on your investment profile, financial situation and place in life, automated investing platforms help select a straightforward, diversified suite of ETFs tailored to your needs, preferences and long-term goals. You don’t have to take on the often intimidating task of selecting your own individual stocks or ETFs. And, relative to one-on-one, human financial advice, robo-advisors tend to cost less money.

Additionally, most robo-advisors regularly monitor your account, rebalancing your positions to maintain ideal portfolio diversification and, in some cases, maximizing your investments in association with taxes, via tax-loss harvesting.

Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.

This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.

Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.

What is in this guide?

- Introduction to robo-advisors

- Growth of robo-advisers

- How to open a robo-advisor account

- Robo-advisors versus traditional investing

- Robo-advisors versus financial advisors

- Modern portfolio theory and robo-advising

- Robo-advisor fees and account minimums

- Features found in robo-advisors

- Is a robo-advisor right for you?

- Frequently asked questions (FAQs)

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