Robo-advisor

Also called Automated investment service, Digital advisor

An online service that uses algorithms to build, invest and rebalance a diversified portfolio for you, usually at a low annual fee.

What it means

A robo-advisor asks about your goals, timeline and risk tolerance, then places your money in a mix of low-cost funds, typically ETFs, and keeps it on target automatically. Many also offer features such as tax-loss harvesting and automatic deposits. Some pair the software with access to human advisors for a higher fee.

Robo-advisors are usually registered investment advisers, which means they owe clients a fiduciary duty, and the accounts are held at a brokerage that is typically a SIPC member. Fees are commonly a small percentage of assets per year plus the expense ratios of the underlying funds. As with any investment account, values can fall and there is no deposit insurance on the investments.

Example

Suppose a robo-advisor charges 0.25% a year on a $20,000 account. The advisory fee would be $50 a year, before the funds’ own expense ratios.

How it’s used

Starting to invest without picking individual funds
Automating rebalancing and regular contributions
Getting a diversified portfolio at a lower cost than many human advisors

Strengths and weaknesses

Strengths

Low minimums and generally low fees
Automatic diversification and rebalancing
Removes some emotional decision-making

Weaknesses

Limited personalization for complex situations
Percentage fees still add up as balances grow
Investments can lose value; no deposit insurance

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.