Robo Advisors: How Do They Work?

Written By Mary Beth Eastman
Last updated April 28, 2020

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July 13, 2018

Simple. Thrifty. Living.

Have you been curious about robo advisors? If you’re looking to do some investing, but don’t want to learn all the ins and outs of the financial marketplace on your own, a robo advisor might be exactly the tool you need. The best robo advisors use software that ask you about your needs and goals, and then invest your money according to the best current portfolio research.

The digital convenience of online financial interactions is growing, and robo-advisor platforms have been part of that growth. Through Betterment, for example, you can sync your various financial accounts in order to see if you’re paying more than you need to. Their intelligent software learns your priorities and helps you with financial planning, and human experts are available to answer questions.

If you’re looking to provide for your retirement, or save up for a specific goal, the robo advisor software is a great way to balance risk and return. The established robo advisors such as Betterment and Wealthfront follow the fiduciary standard. That means they have to act in your best interest, not sell you investment products that bring them higher profit. Financial advisors are no longer required by law to meet this standard. Furthermore, robo-advisor fees are a fraction of the cost of an in-person financial advisor, and the software has inexhaustible focus as it continually fine-tunes your portfolio. See how Betterment and Wealthfront compare when it comes to online investing.

The biggest reason that individual investors lose money is that they act on the basis of their emotional reactions. The classic example of such an impulse is when the price of a stock slips down, and the investor panics and sells at a loss. Robo advisors make decisions on the strength of demonstrated outcomes, protecting your wealth from the consequences of human impulse. Furthermore, they keep your portfolio diversified by investing in funds (“baskets” of stocks) and bonds, rather than in individual stocks.

Robo advisors are great for newer investors or people whose portfolios are relatively simple. Some younger investors at the start of their professional careers employ robo advisors because they have a long-term horizon and don’t want to spend hours tracking the financial markets. On the other hand, if you have a more complex situation involving stock options and tax questions, or if you’re approaching retirement, you’ll probably be better off getting answers from a human being.

The take-away? Robo advisors offer you a friendly middle ground between figuring out your asset allocation on your own, and sitting down with a high-priced financial professional.

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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