Robo-Advisors: How They Work and What They Cost

A robo-advisor is an online service that invests your money for you using algorithms. You answer questions about your goals, timeline and comfort with risk, and it builds and maintains a portfolio.

How it works

1. You fill out a questionnaire.
2. The service recommends a mix of stock and bond funds, usually low-cost ETFs.
3. You deposit money once or set up automatic contributions.
4. It rebalances automatically as markets move.

Some services also offer automatic tax-loss harvesting in taxable accounts and access to human advisors for an extra fee.

What it costs

Many robo-advisors charge an annual management fee of about 0.25% of your balance, on top of the expense ratios of the funds inside your portfolio. On a $10,000 balance, a 0.25% fee is $25 a year. Some charge flat monthly fees, which can be expensive on small balances.

Robo-advisor vs. doing it yourself

• DIY with a target-date fund: Usually cheapest; one fund handles diversification and rebalancing.
• Robo-advisor: More customization and features for a modest fee.
• Human financial advisor: Personalized planning for complex situations, typically at a higher cost.

Who robo-advisors fit

• Beginners who want a hands-off, diversified portfolio
• People who don’t want to rebalance themselves
• Investors who’d benefit from automatic tax-loss harvesting in a taxable account

Questions to ask before you sign up

• What is the total annual cost, including fund fees?
• Is there a minimum balance?
• Can I choose a more or less aggressive mix?
• Are accounts protected by SIPC?
• How easy is it to move my money out?