How to open an account with a robo-advisor
Once you've picked a robo-advisor, the next step is to fill out an account application on its website. You'll have to provide some personal details, including your Social Security number, and you'll probably need to fill out some tax-related information.
Opening an account with a robo-advisor is typically a quick and straightforward process. There aren't many hoops to jump through -- after all, the idea of a robo-advisor is to make investing as painless and approachable as possible.
How to get started with a robo-advisor
After you fill out your account application, your robo-advisor will likely ask some questions to help determine how it should invest your money. It'll already know your age from your application, and this is a big determinant of how your investments should be allocated. But you'll also need to answer questions about things like:
- How comfortable you are with volatility and risk
- Your future plans
- Your investment objectives.
Some robo-advisors might allow you to skip the questions and select from several pre-made portfolios (usually with names like "aggressive" or "moderately conservative").
The next step is to make your initial deposit. Many robo-advisors have a minimum initial deposit requirement, and even some of those that don't have a minimum amount required before your money can be invested. After you've made a deposit, the robo-advisor will do the rest!
How much money do I need to invest with a robo-advisor?
This depends on the robo-advisor you choose. Some will let you open an account with as little as $1; others require hundreds or thousands of dollars.
Make sure to keep an eye out for separate minimums to access certain features. For example, you might need to invest a certain amount of money in the account to be able to access human financial advisors.
How much does a robo-advisor cost?
There are two primary types of fees for most robo-advisors:
- Management fee: Not all robo-traders charge a management fee, but some do. This fee gives you access to the robo-advisor's features and services. Management fees are often expressed as a percentage of your managed assets on an annual basis, so a 0.25% management fee means that you'll pay $2.50 per year for every $1,000 invested. Some robo-advisors charge a flat fee instead of a percentage.
- Investment expenses: The funds a robo-advisor invests your money into -- the same ones a human advisor would invest in -- often come with their own fees, called the "expense ratio."
It's important to consider the combination of these fee types, often collectively referred to as the "all-in" cost of a robo-trader. All-in costs typically range from 0.03% to 0.50%.
Are robo-advisors safe?
With a robo-advisor, your account is protected in the event that the brokerage or robo-advisor fails. The Securities Investor Protection Corporation, or SIPC (essentially the investing version of the FDIC) protects the cash and securities held in your account at a SIPC-member brokerage firm.
However, with a robo-advisor, the value of the investments in your account can go down. If the stock market is weak, or the economy struggles, investments can lose money. While the type of index funds most robo-advisors use are unlikely to result in a total loss (or anything close to one), and the stock market's value generally rises over long periods of time, it's important to know that there's no guarantee the value of your account will go up and that it could lose money, especially over short periods.
Are robo-advisors worth it?
Yes, for some investors. Robo-investors generally charge lower fees than human investors, and can be less stressful than picking investments on your own.
A robo-advisor may be worth it to you if you fit into one of these groups:
- Newer investors: If you don't have a ton of money to invest or you don't have the level of knowledge to be comfortable making your own investment decisions, a robo-advisor can help you get started with a custom-designed portfolio and minimal capital.
- Hands-off investors: Many people who know the basics simply don't want to spend their time researching and managing investments and could benefit from a program robo trading on their behalf. Robo-stock advisors can allow you to put your investments on auto-pilot, and at a cheaper cost than hiring an advisor.
- Tax concerns: If you're investing a large amount of money or you have a high income, the tax optimization strategies offered by some robo-traders can easily justify the management fees all by themselves.
- You don't like fees: As we've seen, lower investment fees can make a big difference over time. If you're concerned about paying too much for investment advice, a robo-stock advisor could be the solution for you.
What is a robo-advisor?
"Robo-advisor," or "robo-investor," refers to any investment platform that automates key components of investment planning that were traditionally handled by a human advisor. They use algorithms to help design an age- and risk-tolerance appropriate investment portfolio using ETFs and mutual funds.
Features and costs among robo-advisors vary significantly.
How do robo-advisors work?
Robo-traders automate certain components of the investment planning process. Robo-stock advisors can assess your risk tolerance, determine your investment time horizon and goals, and allocate your investment portfolio to maximize return potential without too much risk.
Do robo-advisors only invest in ETFs?
All of the robo-advisors we cover use exchange-traded funds, or ETFs. Generally, a robo-advisor will allocate your money into a portfolio of ETFs that are appropriate for your risk tolerance, age, and investment goals.
Typically, the ETFs used by robo-advisors fall under the category of index funds, which are passive investment vehicles that aim to track the long-term performance of a certain benchmark index.
For example, an S&P 500 index fund would own all 500 stocks in that index to replicate its performance over time. Some robo-advisors use actively managed ETFs (where the stocks it owns are picked by investment managers), but this is far less common.
Fact Checked
Ashley Maready
2024 Award Winner
