How Do Robo-Advisors Work? [Fees, Benefits & More]


Financial planning is an important aspect of our lives. Online services—with the help of a Robo-advisor—make financial planning easier by receiving investment help at a low cost or no minimum initial investment. But what is a Robo-adviser? How do Robo-advisors work? What services do they provide, and what are the benefits of using one? This article addresses these questions and more.

What Is a Robo-Advisor?

The Robo-advisor definition includes digital platforms that provide automated financial planning services. Robo-advisors do not require any human supervision while collecting information from clients about their financial situation and future goals via an online survey or questionnaire. The Robo-advisor then uses this data to offer advice and automatically invest client assets. What is Robo investing? Robo advisors are also called automated investing (or Robo investing).

NOTE: Robo-advisors became popular in the 2008 post-financial crisis because they offered long-term investment schemes with lower risk. This had led several Robo-advisors to direct their funds to an exchange-traded fund (ETF) portfolio.

How Do Robo-Advisors Work?

Some services of a good robot-advisor include goal planning, accounting structures, setting up of security systems, profile services and management, customer support, detailed guides, and low-cost fees. To manage investments, Robo-advisors depend on the automation process of a Robo-advisor algorithm, which works alongside the client’s status, preferences, assets, and plans.

The process begins with the client signing an agreement for discretion management, which authorizes the Robo-advisors to base their investments on the current market trends to further allocate the client’s capital. Questions related to the finances and investment goals are asked, and investor profiles are created.

To complete the profiles, risk tolerance is also taken into consideration. The client then chooses a portfolio from various selections that would be most suitable for the client’s investor profile. They, then, need to open a bank account for investment purposes.

Robo-advisor software uses machine learning algorithms to predict stock market updates. It accomplishes all the processes to develop an ideal investment strategy after an in-depth assessment of the returns and risks.

Robo-advisors primarily cater to mutual funds, index funds, exchange-traded funds, and equity-based funds. In your Robo-advisor vs financial advisor decision, you can also learn about the best cheap stocks to buy now.

NOTE: The first Robo-advisors (Betterment and Wealthfront) were introduced in the US in 2008. If you’re a budding investor, check out the best investment tools here.

Robo-Advisor Services

Robo-advisors offer several services that make investments much easier. The three primary services provided by Robo-advisors include:

Tax Optimization

Tax optimization refers to the process of eliminating or deducting tax liabilities by applying tax-efficient processes. There are several tax optimization strategies you can use, including intermediary schemes, procedural accounting of social payments, and applying company proceedings. You can easily obtain tax optimization services with Robo advice and learn more about tax minimization and optimization strategies.

Automatic Rebalancing

Another service provided by Robo-advisors is automatic rebalancing. This is a simple procedure in which the percentage you want for each holding is fed into the system, along with the desired rebalancing frequency. You can set the time intervals for executing the buying and selling procedure to help the accounts reach the desired percentage fed into the system.

Financial Planning Tools

Robo-advisors provide complete financial planning for your account. There are several top Robo-advisor financial planning tools you can use to help with your investments and finances, including Betterment, Vanguard Digital Advisor, Wealthfront, Ellevest, SoFi Automated Investing, and Stash.

Robo-advisors also allow you to select limited stocks, but you cannot purchase individual stocks or bonds in your account. They most typically use mutual funds or exchange-traded funds rather than individual stocks to build your portfolio. To ensure that you don’t end up investing in the wrong stocks, you should check out the most ideal TaaS stocks to buy.

Key Takeaways

Should I use a Robo-advisor? Note some key takeaways to help you decide:

Robo-advisors are data-driven, digital platforms that provide fully automated investments. They do not need much human supervision.
Robo-advisors offer tax optimization services and automatic rebalancing and tax strategies that follow the mean-variance optimization principle.
Robo-advisors are cost-effective investment solutions that allow anyone to use their services, even with a minimum account balance.
They are most suitable for direct investments and less suitable for complex investing, such as estate planning.
Top Robo-advisor tools include Betterment, Wealthfront, Ellevest, and Vanguard Digital Advisor.

Robo-Advisor Fees

Do Robo-advisors work with various fees? Robo-advisors are cost-effective and inexpensive investment solutions, used even by those with limited budgets. Note some details about the fees of Robo-advisors:

No Minimum Balance

One of the many advantages of Robo-advisors is that there is no minimum balance in most of its tools. All tools do have different minimum balances, but the amounts are minimal to allow more individuals to use them.

No Transaction Fees

No transaction fees are applicable if you use the platform of the robot-advisor tool. There are, however, different fee structures for different services.

Fixed Fee

Monthly fees for using Robo-advisors stand around $7.00 to $14.00 per month. Management fees depend on the portfolio and services, with a minimum percentage of about 0.40% to 0.50%. Comparing the Robo advisor vs human scenario, Robo-advisors are more cost-effective.

Percentage of Investment

The percentage of investment depends on the management and services provided, beginning from a minimum of 0.25% for most of the Robo-advisor tools.

Free Trials

The free trial policies differ for each tool, ranging from 14 to 30 days. Some tools offer an extension if you don’t see profit during your free trial.

Robo-Advisor Benefits

There are several advantages and benefits of Robo-advisors, including four primary ones:

Low Minimum Balance

For investors with a small net worth, professional Robo-advisory services and management hold a big advantage. Several Robo-advisor tools, like Betterment, do not specify any minimum balance for investors. But a minimum amount of $1,000 to $5,000 may be required to start using the Robo-advisors.

Market Expansion for Financial Advice

Robo-advisors can give professional financial assistance and Robo advice to young investors who are trying to expand their businesses. Robo-advisors give easy access to such investors and offer a professional management plan that attracts more consumers to use this service.

Variable Sizes of Robo-Advisors

Several Robo-advisors offer tax harvesting and rebalancing. Robo-advisors are distinguished from one another by their style and approach—the most popular ones take a single, hybrid-style approach. Others of a larger size (offering more features) include Rebalancing IRA and Personal Capital. If you want to know more about IRAs, check out How do Roth IRAs work?

Nobel Prize-Winning Models

Computer algorithms of several Robo-advisors tend to rely on investment models from Nobel Prize-winning theories. Betterment, for example, greatly relies on the theories provided by Nobel Prize winners, Eugene Fama and Robert Shiller.

Robot advisors use cutting-edge portfolios for research and investment. The answer to the question of how Robo-advisors work can also be seen in the theories of the 1990 Nobel Prize winner, Harry Markowitz. These theories allow an investment portfolio to give maximum returns with minimum to no risks.

There are also unique Robo-advisors, such as Empirica, that give advice related to cryptocurrencies. Learn more about the best cryptocurrency to invest in here.

NOTE: Statistical reports have shown that in 2020, the total market size of Robo-advisors amounted to $897 billion.

Are Robo-Advisors Worth It?

Are Robo-advisors safe? Are they worth your time and energy? In addressing these inquiries, ask yourself these five important questions:

  1. What are your financial plans and requirements?
  2. Is the Robo-advisor fee affordable?
  3. Does a Robo-advisor add value by offering extra benefits and features?
  4. Given your current financial status, is there a need for a financial planning service?
  5. Do you want to personally take advice from someone before making investment decisions, or do you want to do it online?

Our research has concluded that Robo advice is worth your investment. Robo-advisors are especially ideal for new investors entering the market because of their low cost, simplicity of use, and low investment fees. To know more about investments that give good returns, check out the best real estate investment here.

Robo-advisors are a great starting point for building wealth. If your resources are limited to $25,000 or below, it’s a great option for financial planning. But for resources in the six-figure range, it’s advisable to seek the assistance of a human advisor to offer experiential advice and accountability for the plans. Retirement funds also play a major role in your finances and wealth—make sure you choose the best retirement funds.


How do Robo-advisors work? Robo-advisors are a great tool for financial planning and portfolio management to give you a good return and eliminate risks and losses. They use minimum to no human interaction, which makes your investment processes more convenient. Robo-advisors are inexpensive and are a great tool for your financial planning.


How many robo-advisors are there?

There are more than 100 Robo-advisors that provide financial assistance and portfolio management. They are considered to be a breakthrough service for managing your wealth and are more cost-friendly than human advisory services. Some popular Robo-advisors include Betterment, SoFi Automated Investing, and Wealthfront. It might be a bit difficult to first understand how to use Robo-advisors, but it’s worth your time and energy.

How much money can you make with robo-advisors?

The total amount of money that you can make depends on your initial investment. Higher investments in robo-advisors can give you higher returns. The main way of earning via robo-advisors is by paying a wrap fee (a comprehensive charge for providing a bundle of services) based on assets under management (AUM), which measures the market value of all financial assets.

Are Robo-advisors a good idea?

Robo – advisors offer valuable services for your investment. Some essential services of a good robot-advisor include a robust security system, goal planning, convenient account setup, detailed guides, profile services, management, customer support, and low costs and fees.

How do Robo-advisors work?

Robo-advisors work by automated machine learning, using data-driven algorithms to plan clients’ investments and assets. There are different portfolios for various investors. Robo-advisors focus on the choices and goals of their clients—with their current financial status—and offer financial advice according to their findings.


I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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