Key Takeaways

Robo-advisors are automated services that manage an investor's portfolio based on basic information and investing goals. They are cost-effective alternatives to traditional financial advisors but come with some drawbacks.

Definition and Examples of Robo-Advisors

Robo-advisors are software products that assist in investment management without the need for a financial advisor. They are offered by various financial institutions, both established ones like Fidelity and newer ones like Acorns.

How Do Robo-Advisors Work?

New users start by providing information about their investment goals through an online questionnaire. Robo-advisors use algorithms to create a diversified investment portfolio that aligns with the user's goals. They also offer features like automatic rebalancing and tax-loss harvesting strategies.

Investments In a Robo-Managed Account

Most robo-advisors use low-cost ETFs to build portfolios, emphasizing stock and bond allocations. Some platforms may also allow customization based on ESG criteria.

How Taxes Work for a Robo-Advisor Account

Tax implications for robo-managed assets depend on the type of account in which they are held. Users may need to pay taxes on earnings if investments are held in a taxable account. Rollovers or transfers from existing accounts to robo-advisors may have tax consequences as well.

Robo-Advisor Fees

Robo-advisor fees can be fixed monthly or based on a percentage of assets. Fees range from $1 as a fixed fee to approximately 0.15% to 0.50% as a percentage fee, in addition to any investment fees.

Pros and Cons of Robo-Advisors

<strong>Pros:</strong> Robo-advisors require no investing knowledge, are time-saving, and use simple strategies.

<strong>Cons:</strong> Limited human interaction, restricted investor options, and the need to open multiple accounts for specific investments.