Robo-advisors are a new way to invest your wealth. Also known as automated investing platforms, they are well suited for people who have mutual funds or stocks and are looking for a better option.

If you hold stocks or mutual funds, you already know some of the problems:

  • Trading individual stocks is a hard game to win. You are trying to outsmart the smartest investors out there, with vastly more resources and time and information than you.
  • Registered investment advisors (RIAs) typically aren’t an option until you have $100,000 ready to allocate. And even if you do invest $100,000 with an RIA, your 1% fee of only $1,000 per year means that you are just one of hundreds of clients for that RIA.
  • As you age and your financial situation changes, you are supposed to change the mix of stocks and bonds. But other than some rules of thumbs, how do you know what the right mix is?

The Robo-Advisor solution

Robo-advisors use technology to:

  1. Capture your financial situation and its many data points like age, income, and risk tolerance
  2. Plug those data points into algorithms that are typically derived from academic research
  3. Create a custom investment portfolio just for you
  4. Rebalance that portfolio as some asset classes go up or down
  5. Refine your portfolio as your financial situation changes

Because it’s done by technology rather than a human RIA, robo-advisors are able to offer these services are low fees, typically 0.25% of your assets per year. Compare that to the typical 1% an RIA charges!

Beyond low cost, the power of technology enables robo-advisors to do things the one-size-fits-all mutual funds simply can’t, like direct investing, which eliminates mutual fund fees; and tax loss harvesting, which helps you reduce your taxes.

Traditional stock brokers and investment advisors like Fidelity and Charles Schwab have also launched robo-advisors, so robo-advisors are likely to become the preferred way to invest.

FSRankings covers the technology enabled financial services, and has reviews and recommendations on all the major robo-advisors. Read on and pick one for yourself!