How a robo-advisor works and benefits investors
Financial advisors help investors make smart decisions about their investments, set goals, and reach those goals in an ever-changing environment. But with the progression of technology, algorithms, and artificial intelligence, financial institutions across the board are oﬀering an increasingly popular alternative to the traditional personal advisor: the robo-advisor.
But how do they work? Read our overview about how robo-advisors can help investors with financial management and why a robo-advisor might be a good fit for your investing needs.
What's a robo-advisor?
A robo-advisor is an online platform that manages your investments automatically while helping you reach your financial goals. It's financial advice that comes from an algorithm—in other words, a computer program—instead of a person.
This image is an example only.
How does a robo-advisor manage investments?
A robo-advisor combines your information with its programming technology to create your personalized investing strategy. When a robo-advisor works 24/7 to manage your portfolio, it automatically adjusts your investments to current market conditions. It can review and rebalance your allocation of assets (stocks, bonds, and cash) in response to your specific investment goals and timelines.
You can add a robo-advisor to your existing portfolio or open a new account with the required minimum investment. When you sign up for a robo-advisor, the system may walk you through an initial setup that asks you for basic investing information that could include:
How a robo-advisor helps simplify investing
There are multiple ways a robo-advisor can help with simplifying the complex world of investing. First, it's always on—meaning it requires little supervision or input after the initial intake of your goals and timelines. The 24/7 nature of a robo-advisor means that your portfolio can respond quickly to new goals and market changes without human intervention. Additional benefits of using a robo-advisor may include:
Who should consider a robo-advisor for financial management?
Not everyone needs or wants to be an investing expert. And that's okay. A robo-advisor is a great option for those who don't want the stress of keeping up with the markets or managing their own portfolios. You can simply set up your account and check in as often or as little as you want. And you get the peace of mind that comes from knowing your money is working hard for you without the time and eﬀort it takes to do everything yourself.
A robo-advisor is also a great tool for those who want guidance at a lower cost. Traditional financial advisors usually cost more, and if you're just starting out, you may not be willing or able to factor that cost in your budget.
What you should look for in a robo-advisor
Not every robo-advisor is the same, and you should evaluate each option according to your goals, your investing preferences, and the account features that are important to you.
As mentioned earlier, robo-advisors are run by programs. The program coding, which serves as the foundation for the behavior and responses of a robo-advisor, will directly reflect the investment philosophy of the platform's provider.
So you're not just assessing the tool itself. You're also evaluating the company behind it, which leads to additional questions: Do you trust the company and its investing philosophy? How does the company serve its clients, and how is that reflected in its robo-advisor?
Cost is also an important factor to consider. Robo-advisors have advisory fees, so it's best to choose one that's low-cost and doesn't charge extra fees. Be sure to also look at the investment minimum, which is how much the robo-advisor requires to service your portfolio. This can range from a few hundred dollars to thousands or even tens of thousands of dollars.
Robo-advisors: The low-cost advice alternative
Robo-advisors can oﬀer simplified investing for investors who want professional guidance without the cost of a traditional advisor. Because every robo-advisor is diﬀerent, it's important to pick one that you trust and that makes sense for your goals. Remember, you don't need to be an expert to start (or continue) investing. But if you're looking to delegate your portfolio management, a robo-advisor may be a good fit for you.
Vanguard Digital Advisor®
If you think automated investing is right for you, consider Digital Advisor, Vanguard's robo-advisor.
All investing is subject to risk, including the possible loss of the money you invest.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Vanguard Digital Advisor is provided by Vanguard Advisers, Inc. ("VAI"), a federally registered investment advisor. VAI is a subsidiary of VGI and an affiliate of VMC. Neither VAI nor its affiliates guarantee profits or protection from losses.