First launched in the early 2000s, robo-advisers were used as an online interface to assist investment managers in handling their client’s assets efficiently. Since 2008, robo-advisers have become publicly available, providing beginner and experienced investors with a simple and relatively low-cost automated investing service. As with any investment product, it’s essential to understand how a robo-adviser works and if it aligns with your goals, risk tolerance and investing needs before diving right in.

How do robo-adviser’s automate investing?

At the core of any robo-adviser platform are complex mathematical rules and algorithms designed in collaboration with investment managers, financial advisers and data scientists. These algorithms’ common goal is to provide investors with a standardized investing portfolio aligned to their desired risk preference, time-horizon and expected return range. The portfolios can include any mix of securities, including exchange-traded funds, stocks and bonds, which are auto-rebalanced over time to maintain the right amount of risk and diversification. Investors can contribute to the portfolio whenever they like and can change their portfolio risk level as they see fit, but they can’t change the individual investments held within their standardized portfolio.

Robo-adviser fees

Considering robo-advisers do not require an investment manager or financial adviser’s assistance in managing the portfolio or meeting with the client, the fees are generally lower. The fee structure for most robo-advisers includes two main components, an account management fee for using the platform and an investment expense ratio for the securities held within the portfolio.

Is a robo-adviser right for you?

Robo-adviser’s may sound like the ideal investing service, but there are a few considerations to keep in mind before opening an investment account or changing your current investment strategy. When it comes to personalization and risk, robo-advisers are designed to provide a relevant portfolio by asking you a series of pre-determined questions when opening an account to help meet your preferred risk tolerance and investing goals. While this does help to suggest an optimal portfolio, robo-advisers do not compare to the comprehensive and personalized services a registered investment manager or financial adviser can offer. Registered investment professionals can develop a tailored investment strategy that helps you achieve your current financial goals and adjust your investments as your risk tolerance and priorities change in life. Human interaction with a registered investment professional can also grow your understanding of investment products, your investment portfolio and enable you to stay focused on your goals.

Robo-advisers have skyrocketed in popularity, providing many investors with a low-cost, diversified and hassle-free approach to wealth management. If you are interested in a robo-adviser, consider the level of investment guidance you need and whether a standardized portfolio is a right tool for your investing strategy.