Not long ago, getting a professionally managed investment portfolio meant either having a lot of money or paying significant adviser fees. That’s changed. Robo-advisors have made it possible for anyone to invest in a diversified portfolio from as little as $1, managed automatically by software that rebalances your holdings and keeps your costs low.
This is genuinely one of the most useful developments in personal finance in the past decade.
What Is a Robo-Advisor?
A robo-advisor is an online platform that uses algorithms to build and manage your investment portfolio. You answer a few questions about your goals, timeline, and risk tolerance, and the software does the rest. It selects a mix of assets, usually low-cost index funds or ETFs, and automatically rebalances your portfolio as markets move.
The appeal is simplicity. You don’t need to research individual stocks. You don’t need to know when to buy or sell. You just set your goals and contribute regularly.
Most robo-advisors charge a fraction of what a human financial adviser charges. Betterment and Wealthfront, two of the most popular in the US, charge around 0.25% annually. Compare that to 1% or more for a traditional adviser, and the cost savings over decades of investing are substantial.
Who Are Robo-Advisors For?
Robo-advisors work well for people who are new to investing and don’t want to make complex decisions, people who want a hands-off approach once their investments are set up, and people who are building long-term wealth and simply want a sensible, diversified portfolio.
They’re less suited to people who want control over individual stock picks, those who need complex tax planning or estate advice, and those with very complex financial situations that require human judgement.
For the average person building their first investment portfolio, a robo-advisor is often the best starting point.
The Main Robo-Advisors Worth Knowing
Betterment is widely considered one of the best robo-advisors for beginners. It offers goal-based investing, automatic rebalancing, and tax-loss harvesting even on the free tier. You can start with any amount.
Wealthfront is another strong option, with additional features like a high-yield cash account and direct indexing for larger portfolios. It also has a $500 minimum to start investing.
Robinhood, known primarily as a stock trading app, also offers a managed investment product called Robinhood Gold that includes a robo-advisor component. Its low minimum and recognisable brand make it popular with younger investors.
M1 Finance takes a hybrid approach. You can build your own portfolio from pre-made templates, or let the platform manage everything automatically. It charges no management fees for the standard account.
What to Watch Out For
Robo-advisors are not magic. They invest your money in markets, and markets go down as well as up. During a market downturn, your portfolio value will fall. The key is not to panic and withdraw your money at the wrong time.
Tax-loss harvesting, which some platforms offer, can help reduce your tax bill during down periods. But it only applies in taxable accounts, not in tax-advantaged accounts like an IRA or 401(k).
Also check the fees carefully. Some robo-advisors charge additional fees for premium features, and these can add up if you’re not paying attention.
Are They Worth It?
For most people, yes. The combination of low fees, automatic management, and accessible minimums makes robo-advisors an excellent way to start building wealth without needing a finance degree.
The evidence consistently shows that passive, low-cost investing outperforms most actively managed strategies over the long term. A robo-advisor essentially automates this approach and removes the temptation to make poor timing decisions when markets get volatile.
If you haven’t started investing yet because it feels too complicated, a robo-advisor removes most of that friction. The hardest part is setting it up. After that, you just keep contributing.
Note: This article is for educational purposes only and does not constitute financial advice. We may earn a commission if you sign up via affiliate links in this post.
Ready to Start Investing with a Robo-Advisor?
If you’re ready to put your money to work automatically, here are two of the best robo-advisors to get started with today:
- Betterment — The original robo-advisor. Start with just $10, 0.25% annual fee, tax-loss harvesting included.
- M1 Finance — Zero management fees, automated rebalancing, and you can customize your portfolio “pie.” Start with $100.
Both are excellent choices for beginners. The best one is simply the one you actually start with.
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