Key takeaways
Robo-advisors use algorithms to automatically build and manage an investment portfolio around your goals and risk tolerance.
They usually cost far less each year than a traditional human financial advisor.
You can choose fully automated platforms or hybrid services that add access to human advisors.
Robo-advisors work best if you want hands-off investing with straightforward financial goals.
Robo-advisors help automate portfolio management, and they are changing how everyday people invest. If you have wondered whether to get help investing but want to skip the cost of a human advisor, you are in the right place. We will walk you through what robo-advisors are, how they work, how much they cost, and whether one fits your financial goals.
What is a robo-advisor?
A robo-advisor is a digital investment platform that uses algorithms to automatically build and manage your portfolio. It gathers information about your financial goals, risk tolerance, and timeline through a short online questionnaire, then creates and maintains a portfolio for you.1
These platforms make investing more accessible for new investors and anyone who wants a hands-off approach. You typically pay an annual fee of about 0.25% to 0.50% of your balance, which is well below the 1% or more that traditional financial advisors often charge.2
How do robo-advisors work?
To decide if a robo-advisor is right for you, it helps to understand how one works. The exact steps depend on the platform, but here is a general guide.
They identify your goals, your risk tolerance, and your target dates. This helps the robo-advisor build a portfolio that fits your goals and make ongoing decisions for your money.
They invest your money based on your risk tolerance. Investments often include low-cost mutual funds, index funds, bonds, stocks, or exchange-traded funds, also called ETFs. The aim is to grow your returns through low-cost, diversified investments.
They monitor your investments and market activity, then automatically rebalance to keep your mix of assets on track.
You can keep contributing to help your investment grow over time.
The goal of a robo-advisor is to help you reach your financial goals without high fees or deep knowledge of the stock market.
What's an ETF?
An exchange-traded fund, or ETF, is a type of security that holds many investments, such as stocks, bonds, and gold. You can buy and sell ETFs on a stock exchange.
Types of robo-advisors
Robo-investing services generally fall into three main categories. Here is how they compare.
Robo-advisor companies are fully automated platforms that manage your portfolio using algorithms. You set your goals and risk tolerance, and the system handles investment selection and rebalancing.
Hybrid robo-advisors combine automated management with access to human financial advisors when you want guidance on more complex situations.
Traditional advisors with robo products are established firms that offer both automated and personalized services. They often provide comprehensive planning alongside robo tools, but usually charge higher fees for the added help.
Benefits of using a robo-advisor
Robo-advisors have several advantages over traditional financial advisors. Here are the key ones.
Low minimum: Many robo-advisor platforms let you start with a small amount, which makes them accessible when you are just getting started.3
Lower costs: Fees often range from 0.25% to 0.50% each year, well below what traditional advisors charge.2
Automated management: The algorithm handles rebalancing and day-to-day decisions, so you can stick to your long-term plan without reacting to every market swing.
Built-in diversification: Your money is spread across different types of investments, which can help reduce overall risk.
Drawbacks of using a robo-advisor
A robo-advisor is not the right fit for everyone. It helps to weigh these limitations before you sign up.
Limited personalization: Robo-advisors are built for straightforward goals and may fall short for complex needs like estate planning, trusts, or detailed tax strategies.
Less human support: A basic robo-advisor gives you little personal guidance, which can feel limiting during volatile markets.
Narrower investment choices: Many platforms use a set menu of funds, so you often cannot pick individual stocks or custom investments.
It assumes you know your goals: The advice works best when you already understand your timeline and comfort with risk.
Possible added fund fees: Some investments, such as mutual funds and ETFs, carry their own fees on top of the advisory fee.
How much do robo-advisors cost?
Robo-advisors usually charge an annual fee of about 0.25% to 0.50% of your portfolio's value. That is much less than the 1% or more that traditional financial advisors often charge.2
Here is what that can look like in real dollars.
Investment amount | Robo-advisor cost (0.25% – 0.50%) | Traditional advisor cost (1%) |
$5,000 | $12.50 – $25/year | $50/year |
$10,000 | $25 – $50/year | $100/year |
$25,000 | $62.50 – $125/year | $250/year |
Account minimums vary widely. Some platforms let you open an account with no minimum, while others require a set amount before you can begin.4
Check the fee structure before you sign up. Some robo-advisors charge a flat monthly fee instead of a percentage, and premium features or human-advisor access may cost extra.
Robo-advisors vs. traditional financial advisors
Not sure whether a robo-advisor or a human advisor is the better choice for you? Here is how the two compare.
Feature | Robo-advisors | Traditional advisors |
Cost | 0.25% – 0.50% annually2 | 1% or more annually |
Services | Investment management and automatic rebalancing | Comprehensive planning, including estate, tax, and retirement strategies |
Availability | 24/7 online access | Business hours and scheduled appointments |
Best for | Hands-off investors with straightforward goals | Complex finances or those who prefer a personal relationship |
If a traditional approach fits you better, learn how to choose the best financial advisor for your situation.
Is a robo-advisor right for you?
When deciding whether a robo-advisor fits, consider your financial situation and investing style. Here is a quick guide.
Choose a robo-advisor if you:
Want to invest without picking individual stocks
Have straightforward goals like retirement savings or general investing
Prefer automated management over active involvement
Are working with a smaller budget
Choose a traditional advisor if you:
Have complex finances with multiple income streams or significant assets
Need specialized guidance on estate planning or tax strategies
Value in-person relationships and customized advice
Enjoy hands-on portfolio management
How to stay safe from robo-advisor scams
Scammers sometimes pose as robo-advisors to steal your money or personal information. Here is how to protect yourself.
Verify registration: Check that the platform is registered with the SEC or a state securities regulator, and research any affiliated broker-dealer through FINRA, before you sign up.5
Watch for red flags: Be skeptical of guaranteed high returns or pressure to act right away.
Check website security: Look for "https" in the URL and legitimate security certificates.
Protect your information: Never share login credentials or sensitive details until you confirm the platform is legitimate.
Avoid unsolicited offers: Be cautious of unexpected calls, emails, or messages asking for upfront payments.
Robo-advisors can help you start investing
Robo-advisors make investing more accessible by lowering cost barriers and simplifying portfolio management. They are especially helpful if you are starting out or prefer a hands-off approach.
The key is matching the tool to your situation. If your goals are straightforward and you want automated management, a robo-advisor could be a great fit. If you need comprehensive planning for complex finances, a traditional advisor might serve you better.
Chime® is a financial technology company that works with partner banks, and eligible Chime members now have access to automated investing through Chime Invest™. You can choose a managed portfolio that invests for you or a self-directed option to pick your own investments.6
Ready to learn more? Check out our guides on how to start investing and the best investing apps for beginners.