Pros and Cons of Using a Robo-Advisor for Investing

Robo-advisors are automated digital platforms that build and manage investment portfolios tailored to an investor’s goals. Weighing the pros and cons helps determine if using a robo-advisor is right for your needs.

Pros:

Low Account Minimums – Many robo-advisors have no minimum account balance or extremely low minimums of $5 or $500 to get started. This makes robust investing available to those with limited capital.

Automated Portfolio Management – Algorithms handle portfolio construction, asset allocation, dividend reinvesting, rebalancing, and tax-loss harvesting. This simplifies investing greatly.

Easy Account Setup – Opening a robo-advisor account can be done quickly online in minutes. Robos have streamlined the account creation process.

Low Fees – Robo-advisors provide access to sophisticated investment management at a fraction of the cost of traditional advisors, generally between 0.25% – 0.50% annually.

Diversified Portfolios – Your savings are automatically invested across diverse baskets of ETFs spanning domestic stocks, international stocks, bonds, etc. to mitigate risk.

Tax Optimization – Advanced robo-advisors analyze your account transactions to maximize tax savings, avoid wash sales, harvest losses, and optimize asset location.

Retirement Planning – Many robo-advisors offer tools to forecast retirement readiness, recommend savings rates, plan withdrawal strategies, and manage your portfolio evolution through retirement.

Cons:

Limited Investment Selection – Your investment options are confined to the ETFs in the robo’s portfolios. There is little ability to customize beyond high-level risk tolerance.

Minimal Human Guidance – If you desire one-on-one financial advisor relationships and guidance, robo-advisors offer little personalized advice or hand-holding.

Vulnerable in Market Swings – While robos automatically rebalance portfolios, some investors are uncomfortable not having a human advisor making moves in the face of major market volatility.

Cookie Cutter Approach – Robo-advisors provide generalized portfolio models not customized beyond basic factors like age, time horizon and risk appetite. Models are not tailored.

Account Consolidation Challenges – Those with multiple retirement accounts may find it difficult or impossible to consolidate all assets under the management of a robo-advisor.

No Customization – Unlike a traditional advisor, robo-advisors cannot manually customize portfolios, implement individual stock-picking strategies, or accommodate special requests.

For many investors, the simplicity, convenience and low costs of robo-advisors outweigh the limitations. But understanding both pros and cons allows for an informed decision based on your specific needs.