What Is a Robo-Advisor? How They Work and What They Cost

The distinction that matters most is the second column. A robo-advisor takes custody and takes the decisions. Everything else about the category follows from that, including why the fee is charged as a percentage of assets.

1. It asks you a short questionnaire. Age, goal, time horizon, and a handful of questions designed to gauge how you would react to a fall. The answers produce a risk profile, usually a number on a scale.
2. It maps you to a model portfolio. The risk profile selects one of a set of pre-built allocations, typically a mix of stock and bond index funds. Nobody designs a portfolio for you individually; you are matched to an existing one.
3. It buys low-cost funds. The allocation is filled with ETFs or index mutual funds. This is why robo-advisor portfolios look similar to each other: they are built from the same small universe of broad, cheap funds.
4. It rebalances automatically. As markets move, the mix drifts from its targets. The platform sells what has grown and buys what has lagged to bring it back, either on a schedule or when drift crosses a threshold.
5. It may harvest tax losses. In a taxable account, some platforms sell positions at a loss to offset gains elsewhere, then buy a similar-but-not-identical fund to stay invested. This does nothing in an IRA, because there are no taxable gains to offset.

The mechanical detail of how the questionnaire becomes an allocation, and how rebalancing thresholds work, is in how robo-advisors invest your money.

The name arrived around 2008 to 2010 with the first consumer platforms, and it has aged badly in two directions. There is no robot in the sense the word implies: the machinery is a scored questionnaire, a fixed ladder of allocations and a rebalancing rule, with no forecasting step anywhere in it. And there is very little advice in the sense a person would mean: nobody looks at your situation and forms a view.

Both halves of the name overpromise, which is why people arrive expecting either market prediction or personal advice and find neither. What the category actually sells is execution and discipline, performed reliably for years at a low price. That is genuinely valuable, and it is a different product from the one the name describes.

It also explains a common disappointment. If you ask a robo-advisor what it thinks about a stock you own, or whether now is a good time to invest, it has no mechanism to answer, because having a view is not in the design. Those are questions for a person, or for an analysis tool that reads your holdings.

It suits you if you have money to invest, you do not want to choose the holdings, and you suspect you would not rebalance on your own. That last clause carries most of the weight: the strongest case for the fee is not that the portfolio is clever, it is that the maintenance happens whether or not you feel like doing it.

It does not suit you if you want to own specific companies, if you already hold a portfolio you want assessed rather than replaced, or if your situation involves things a questionnaire cannot see: concentrated employer stock, equity compensation, a business, or a spouse's accounts that ought to be considered alongside yours. In the last case the allocation can be perfectly sensible in isolation and wrong in context, because the model has no way of knowing about the rest.

• It does not pick stocks. It buys broad index funds. If you want individual companies, this is the wrong category.
• It does not promise to beat the market. The portfolio is designed to track markets, minus the fee.
• It does not analyze what you already own. If you transfer a portfolio in, most platforms sell it and buy their own allocation. That matters in a taxable account, where selling realises gains.
• It does not do the rest of financial planning. Estate questions, equity compensation, and tax strategy across your whole situation are a human advisor's territory.

The advisory fee is commonly around 0.25% a year, so about $250 on $100,000, and you also pay the expense ratios of the funds inside the portfolio. A realistic all-in figure is closer to 0.33%. Several platforms charge no advisory fee at all on a base tier, which usually means they earn somewhere less visible, most often by requiring part of your portfolio to sit in cash.

The full breakdown, in dollars across balances from $10,000 to $500,000, is in robo-advisor fees explained.

A robo-advisor answers one specific question well: I have money to invest, I want it diversified and looked after, and I do not want to make the decisions. If that is your question, it is a good and cheap answer, and how to choose one covers what actually varies between platforms.

If your question is instead I already own things and I want to know whether they are working, a robo-advisor does not answer it. It replaces your holdings rather than assessing them. That is a portfolio analysis question, and are robo-advisors worth it works through both cases honestly.