Should You Be Using a Robo-Advisor?

Our recently published 2023 Robo-Advisor Landscape report takes a deep dive into the digital advice landscape in the United States. We also provided our take on 18 leading providers of robo-investing. Our assessment focuses on the factors that most directly help investors reach their financial goals—including fees, quality of portfolio construction and investment advice, and financial planning tools.

Robo-advisors use computer algorithms to provide low-cost asset allocation and build automated portfolios for individual investors. While digital investment advice can be a great option for smaller investors who don’t need—or want—to pay up for a traditional financial advisor, they’re not the best fit for everyone. Here are some key questions to help you decide if this type of financial advice makes sense for you.

Have you already covered the financial basics?

If you’re just getting started in your career, the first order of business is to set up an emergency fund. It’s best to have at least three to six months’ of living expenses set aside to cover unexpected costs, such as car repairs, medical expenses, or a sudden job loss. These funds should be in safe, highly liquid assets that you can easily tap into on short notice if needed, such as a high-yield savings account or money market fund. Longer term, the inflation protection of U.S. government Series I Savings Bonds make them worth considering, though they can’t be sold for one year after initial purchase.

A close second is setting up contributions to your workplace retirement plan, many of which include some matching funds from your employer. Most experts recommend setting aside at least 10% to 15% of your gross salary each year for retirement (including any funds contributed by your employer), and the earlier you get started, the better. While it might be tough to contribute that much if you’re just getting started in your career, even smaller percentages add up over time.

These two steps are a critical foundation for financial success, and you should make sure to check both off your list before you consider a robo-advisor.

Do you want to set up other investment accounts to save for a specific goal?

Most robo-advisors offer a variety of account types, including IRAs and taxable accounts. They typically start with a basic questionnaire geared toward pairing investors with one of several portfolio options composed of low-cost, passively managed funds based on their goals, time horizons, and risk tolerance. As a rule of thumb, robo-advisors steer younger clients toward more stock-heavy portfolios while matching up older investors (or those who need their money in a shorter time frame) with portfolios heavier in bonds and other less volatile assets.

More sophisticated robo-advisors—including Betterment, Schwab, and Wealthfront—collect detailed information about an investor’s finances and use this to analyze the odds of success for a given investment amount and time horizon. Such programs typically incorporate Monte Carlo analysis, a statistical model that simulates thousands of different potential outcomes to estimate the probability of success or failure for a given plan.

Most robo-advisors also have features that allow you to track progress toward your goals over time and change your key assumptions if your financial situation changes.

How much money do you have to invest?

Based on research from Cerulli Associates, only 5% of financial advisors focus on serving investors with less than $100,000 in investable assets [1]. That means financial advice can often be out of reach for those who need it most. Robo-advisors can help fill the gap for smaller investors. Nearly every robo-advisor we surveyed (Empower Personal Wealth, a digital wealth manager that serves the mass affluent, is the lone exception) is open to accounts of $5,000 or less. Several, including Acorns, Betterment, and Ellevest [2], don’t require any minimum investment amount.

And even for those with investable assets in the six-figure range, automated advice can be significantly cheaper than paying for a traditional financial advisor. Another key statistic from Cerulli Associates is that more than 85% of households have less than $500,000 in investable assets [3]. In many cases, households like these can benefit from basic goal planning, retirement savings, and low-cost portfolio management; they may not need the type of complex financial planning needed to justify an annual fee of 1% or more. An investor with a $500,000 portfolio, for example, might pay about 1% of assets per year to a traditional financial advisor, which translates into $5,000 per year. An investor with the same $500,000 portfolio who paid a typical level of fees for a robo-advisor (about 0.30% of assets), in contrast, would pay only $1,500 per year. Moreover, many financial advisors won’t accept new clients unless they have a higher level of investable assets.

How complex is your financial situation?

Complexity is a related issue. For the most part, investors with fewer assets have more straightforward financial needs, while those with higher levels of wealth have more complex planning needs. Investors with larger portfolios can often benefit from comprehensive financial planning, including investment management, insurance and risk management, estate planning, advice on stock-based compensation programs, Roth conversions, retirement drawdown strategies, and tactics for minimizing tax liabilities over time. A qualified financial advisor (ideally one who holds the Certified Financial Planner designation) can often help wealthier individuals sort through these issues.

Individuals taking care of a child or other family member with special needs can also benefit from working with a financial planner. Caregivers often face higher costs for the family member requiring extra care, as well as lower income and fewer retirement resources if caretaking needs make it difficult to work outside the home. Financial planners or attorneys who specialize in this area can help set up a special-needs trust and/or ABLE account, ensure that appropriate plans for long-term guardianship are in place, and plan for potentially higher medical costs for the individual with special needs.

Do you feel confident managing your own investments and financial planning?

Investing doesn’t have to be complicated. The basic principles: Start early and invest for the long term, avoid market-timing, keep costs low, diversify your portfolio, match your portfolio’s risk level with your willingness and ability to take risk, don’t panic when the market goes down, and try to avoid making stupid mistakes, such as buying highly specialized funds in speculative areas. In fact, investors often fare better by sticking with a handful of broadly diversified funds rather than trying to put together ultra-complicated portfolios that incorporate every conceivable asset class.

That said, all of this is easier said than done. Some people enjoy spending time managing their investments and taking control over their financial lives, but others find the process intimidating. (I once met a computer programmer with a doctorate in math who commented that investing was “way too complicated.”) If you feel more comfortable with someone else making the decisions, a traditional financial advisor may be a better way to go.

Many robo-advisors have tried to bridge the gap between digital and human investment advice by incorporating real-time behavioral nudges via text or email to encourage their users to stick with their investment plans and continue taking the steps needed to meet their goals. But if you tend to panic or need a lot of reassurance—or want to make sure you understand the rationale behind how your finances are set up—a human advisor might be a better choice.

Do you prefer to talk through financial decisions with an actual human being?

Robo-advisors were originally envisioned as a technology-only alternative to traditional financial advisors. The advent of online trading platforms and advanced computing power in the early 1990s paved the way for computer-based discretionary asset management. In addition, younger generations who grew up with social media and the internet at their fingertips may actually prefer not to meet with anyone in person. To meet the preferences of young, tech-savvy investors, providers such as Wealthfront have tailored their offerings to maximize tech capabilities and minimize human interaction.

Although fully automated robo-advisors can serve more clients at a lower cost, eight of the 20 robo-advisors we surveyed offer at least some access to financial advisors. Most, however, only provide access with their pricier premium services. There is a tension between keeping a service as cheap as possible and increasing its range of services by letting investors talk to human beings.

Providers such as Betterment, Fidelity Go, Schwab Intelligent Portfolios Premium, and Vanguard Personal Advisor Services can be a good option for investors who still want the option of interacting with a human advisor but don’t want to pay the steep fees for a traditional financial advisor.

Investors who prefer to develop a relationship with a financial advisor or want to have the option of in-person meetings may be better off going the traditional route, though.

Robo-advisors can be good options, but they aren’t for everyone.

Sound investing, withdrawals, and holistic financial planning are as much art as science. In that sense, there will always be a role for traditional advisors, especially with clients whose needs are complicated. Newer and less wealthy investors—who often have limited access to financial advice at a reasonable price—now have excellent options for getting started through robo-advisors.

A version of this article was previously published on March 31, 2022.

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[1] The Cerulli Report—U.S. Advisor Metrics 2022: Trends in Advisor Compensation, P. 116.

[2] Morningstar holds a minority ownership position in Ellevest Inc.

[3] The Cerulli Report—U.S. Retail Investor Products and Platforms 2022, P. 15.