This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A robo-advisor is an online platform that uses algorithms to build and manage an investment portfolio. The investor answers a questionnaire about the goals, the risk tolerance, and the time horizon, and the platform recommends a portfolio of stocks, bonds, and ETFs. The platform rebalances the portfolio automatically, and the platform may also do the tax-loss harvesting. The robo-advisor charges a management fee, typically 0.25 percent to 0.75 percent of the assets under management per year.
The main advantages
The first advantage is the low cost. A robo-advisor charges a fraction of the cost of a full-service broker, and the robo-advisor is cheaper than hiring a financial advisor. The low cost is the main reason the robo-advisors have grown in popularity, and the low cost is most visible for investors with a small account.
The second advantage is the accessibility. The robo-advisor is available 24/7, and the investor can open the account, deposit the funds, and check the portfolio from a phone or a computer. The robo-advisor does not require an in-person meeting, and the robo-advisor does not require a minimum account size for some platforms.
The third advantage is the discipline. The robo-advisor rebalances the portfolio automatically, and the robo-advisor does not react to the news or the market noise. The discipline is a key advantage over human advisors, who may be tempted to time the market or to chase the performance.
The fourth advantage is the tax efficiency. The robo-advisor can do tax-loss harvesting, which is the practice of selling a losing position to offset a gain in another position. The tax-loss harvesting can save the investor hundreds or thousands of euros per year, and the tax savings can add up to a significant amount over the long term.
The main drawbacks
The first drawback is the limited customization. The robo-advisor uses a standard portfolio of ETFs, and the investor cannot pick individual stocks. The investor who wants to invest in a specific stock or sector should use a self-directed broker, and the investor who wants full customization should use a full-service broker.
The second drawback is the lack of advice. The robo-advisor does not provide personalized advice, and the robo-advisor does not take into account the investor's full financial situation. The investor who has a complex financial situation should consult a human advisor, and the investor who has a simple portfolio can use the robo-advisor.
The third drawback is the algorithm risk. The algorithm is a black box, and the investor does not know exactly how the portfolio is built or rebalanced. The algorithm may make a mistake, and the algorithm may not adapt to the changing market conditions. The investor should choose a robo-advisor with a transparent algorithm, and the investor should monitor the portfolio regularly.
The fourth drawback is the conflict of interest. Some robo-advisors earn a commission on the ETFs in the portfolio, and the robo-advisor may be incentivised to choose higher-cost ETFs. The investor should check the expense ratios of the ETFs, and the investor should compare the expense ratios with the expense ratios of low-cost alternatives.
Who should use a robo-advisor
A robo-advisor is a good fit for investors with a small to medium account, who want a low-cost diversified portfolio, and who do not need personalized advice. The robo-advisor is also a good fit for investors who are new to the markets, and for investors who do not have the time or the inclination to manage the portfolio actively.
A robo-advisor is not a good fit for investors who want to pick individual stocks, for investors who have a complex financial situation, or for investors who want a human advisor. The investor who needs advice should use a full-service broker, and the investor who wants to pick individual stocks should use a self-directed broker.
How to choose a robo-advisor
The first check is the management fee. The robo-advisor should publish the management fee, and the fee should be a percentage of the assets under management. The investor should compare the fee across several platforms, and the investor should look for hidden fees such as transaction fees or account closing fees.
The second check is the portfolio. The platform should describe the portfolio construction, the rebalancing rules, and the tax-loss harvesting. The investor should look for a portfolio of low-cost ETFs, and the investor should avoid platforms that use high-cost funds.
The third check is the customer support. The platform should offer customer support by email, by chat, or by phone. The investor should test the support before opening the account, and the investor should look for a platform with a strong support reputation.
Common questions about robo-advisors
Are robo-advisors safe? Yes, when the robo-advisor is regulated and when the platform segregates the client funds. The safety depends on the regulation and the platform's reputation, not on the algorithm itself.
Can I withdraw my money at any time? Yes, most robo-advisors allow the investor to withdraw the money at any time. The withdrawal may take a few business days to process, and the withdrawal may have tax consequences.
What is the minimum account size for a robo-advisor? The minimum varies by platform. Some platforms require €500 or more, and some platforms accept smaller accounts. The investor should check the minimum before opening the account.
Related resources
Where to start
If you are evaluating robo-advisors, the most useful first step is to compare the management fee, the portfolio, and the customer support across three to five platforms. Our broker comparison lists the robo-advisors and the fee schedules, which together tell you what the platform offers before you open the account.