Four Things to Look at When Deciding Between Robo Advisors and Brokerage Accounts

Written By Mary Beth Eastman
Last updated December 8, 2020

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July 26, 2019

Simple. Thrifty. Living.

These days, one of the first choices a beginning investor must make is whether to use a traditional brokerage account or an automated robo advisor. Each of these options has its merits, and the right choice for you will depend on your investment strategy and financial goals. Here are four of the factors you should consider that will help you decide whether a robo advisor or a brokerage account is best for you.

One of the largest differences between traditional brokerages and robo advisors can be found in the fees charged for their services. Most brokerages charge annual fees and commissions on each executed trade. Over time, these fees can add up to a considerable sum. The best robo advisors charge a simple and low management fee expressed as a percentage of your holdings, making them a much lower-cost alternative for investors who are wary of high brokerage costs.

Another major difference between robo advisors and standard brokerage accounts is the degree of control you’ll have over your portfolio. Most robo advisors will allow you to adjust your holdings to include different mixes of stocks and bonds but will not let you allocate money directly to particular funds or ETFs. This fact makes them convenient for more passive investors who aren’t comfortable picking securities on their own. A brokerage account, on the other hand, will let you individually select every stock, bond and ETF that goes into your portfolio and give you vastly more direct control over your holdings.

Because they are often geared toward younger investors, many robo advisors do not require a minimum balance to open an account. By contrast, brokerages tend to require an initial deposit of several hundred dollars or more to open an account. If you do not have enough investment capital to open a brokerage account, you can use a robo advisor to start with and gradually save toward having the minimum deposit required by your preferred brokerage. Alternatively, you can search for a brokerage with a low initial deposit requirement. Online investing sites will typically show the minimum requirements upfront so you can tell.

When making investment decisions, taxes should always be taken into consideration. While the taxes you pay will depend on your exact holdings and strategy, there are some differences between brokerage accounts and robo advisors where taxes are concerned. Generally, trading with a brokerage account will expose you to full standard capital gains tax. Robo advisors, on the other hand, tend to offer users IRA plans that are tax advantaged. Some robo advisors also offer automatic tax loss harvesting as a tool for offsetting the burden of capital gains taxes. Curious about IRAs? This article will help.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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