Behind the scenes, robo advisors are managed by investment professionals who work similarly to traditional financial advisors. Instead of serving one customer at a time, the robo and human advisors work together to serve thousands of customers at once.
When you sign up for a robo advisor, you’ll answer a survey with questions about:
- Your age
- Your Investment goals
- Risk tolerance
- Other nuances
Based on those answers, you are assigned a portfolio weighted to your investment goals. Because there are likely many other people with similar goals, you may have the same portfolio as others. But as long as you get good performance at low costs, that’s no problem.
Here are some key robo advisor features to understand:
- Human-designed portfolios: Portfolios are designed by teams of professional investors and computer engineers to give customers a semi-personalized portfolio aligned with their investment goals.
- Fees are typically lower than traditional advisors: Human advisors often charge a 1% fee or more. With a robo advisor, you’ll generally pay less and some robo advisors don’t charge any additional management fees.
- You’ll have some control over your investments: Some robo advisors give you the option to update your answers or tweak your portfolio.
- Robo advisors may have advanced features: Depending on the service you choose, you may have access to advanced features like automated tax-loss harvesting, automatic rebalancing, different allocations for multiple goals, and other features to improve your financial performance.
Automatic Portfolio Rebalancing
One useful feature that’s very common among robo advisors is automatic portfolio rebalancing. This is an important part of investment management as portfolios often drift away from their target allocations due to varying investment performance over time.
When your portfolio is rebalanced, some investments are sold and others are purchased to bring your portfolio back to its ideal alignment. Human advisors can do this as well, though it typically happens less frequently. When you use a robo advisor, rebalancing occurs on a schedule or with the click of a button.