4 Signs a Robo-Advisor Is a Better Fit Than a Brokerage Account

Don't open the wrong type of account or it could cost you.

When you want to invest money, there are a few different ways you could do it. You could open a brokerage account, which would enable you to build a portfolio of your choosing by transferring money to your broker and buying assets. Or you could opt to open an account with a robo-advisor instead.

Robo-advisors harness the power of technology to actively manage your money for you. You don't have to research and select investments, as your money is automatically put into a mix of different funds that are appropriate for your situation. You pay a fee for working with a robo-advisor, though, while most brokerage firms have made investing extremely affordable.

So, should you be using a robo-advisor or investing with a broker? Here are four signs that suggest a robo-advising service is the better choice for you.

1. You aren't interested in spending any time researching investments

If you invest with a brokerage firm, you're going to need to be comfortable researching the assets you put your money into.

It may not take a lot of time to do this if you opt to invest in exchange-traded funds (ETFs). But you are still going to have to devote some effort and spend a few hours looking into different assets you could buy, comparing their fees and potential performance, and making sure you have a good mix of different investments to minimize risk.

If you don't want to spend this time, then a robo-advisor can eliminate this hassle from your life. You'll just answer a few questions when you open your account, and you won't need to worry about doing any investment research after that.

2. You don't know how to determine your risk tolerance

You need to make sure you are exposed to an appropriate amount of risk given your investing timeline.

For example, when you need to start relying on your investments to produce income soon, you won't be able to wait out economic downturns that could cause temporary losses. In this case, you need a much more conservative investment mix. If you have many years to leave your money invested, though, then you can afford to take a chance on riskier investments that could earn you more money over time.

If you don't know how to determine the amount of risk you should be taking, a robo-advisor can take care of this for you. Based on the goals you share and the financial details you provide, a robo-advising service will automatically invest your money in a mix of different assets that are right for you.

3. You aren't likely to rebalance your portfolio

As mentioned above, your risk tolerance changes depending on where you are in your investing timeline. You could also end up with a portfolio that doesn't have the right asset mix if some of your investments perform much better than others, as the bulk of your money could become concentrated in the ones that do well.

Because of these two issues, you'll need to rebalance your portfolio regularly. That means selling some assets and buying more of others to get back to the right investment mix.

This can be a hassle, and if you aren't comfortable doing it or don't want to spend the time, you can invest with a robo-advisor that will take care of rebalancing for you.

4. You're willing to pay a small fee to be a hands-off investor

The big upside of robo-advisors is that you don't need to know anything about investing or spend any time managing your portfolio when you use one. But the downside is that you have to pay a fee, which reduces returns.

If you believe that incurring higher investing costs is worth avoiding the hassle of being hands-on or the risk of investing without knowledge of how to do it right, then chances are a robo-advisor is the right choice for you.