# What Is a Robo-Advisor?

> **Definition**
>
> A robo-advisor is a digital platform that provides automated, algorithm-driven financial planning and investment services with little human intervention.

A robo-advisor is an automated, algorithm-driven financial planning and investment service with little to no human supervision. A typical robo-advisor asks questions about your financial situation and future goals through an online survey. It then uses the data to offer advice and automatically invest for you.

Other common designations for robo-advisors include "automated investment advisor," "automated investment management," and "digital advice platforms."

The [best robo-advisors](https://www.investopedia.com/the-best-robo-advisors-8764849) offer easy account setup, robust goal planning, account services, and portfolio management. Additionally, they offer security features, comprehensive education, and low fees.

### Key Takeaways

*   Robo-advisors are digital platforms that provide automated, algorithmic investment services with minimal human supervision.
*   They often automate and optimize passive indexing strategies based on [modern portfolio theory](https://www.investopedia.com/terms/m/modernportfoliotheory.asp).
*   Robo-advisors are often inexpensive and require low opening balances, making them available to retail investors.
*   They are best suited for traditional investing and aren't the best options for more complex issues, such as estate planning.
*   Robo-advisors have been criticized for their lack of empathy and complexity.

![Robo-Advisor: Digital platforms that provide automated, algorithmic investment services with minimal human supervision.](https://www.investopedia.com/thmb/_lzbTdle40E6CH5cvCeZiZ7LdBQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Roboadvisor-roboadviser_final-9c0f2c35944e4da6aae8646a832069d1.png)

*— Investopedia / Michela Buttignol*

## Robo-Advisors: History and Investing Strategy

The first robo-advisors, [Betterment](https://www.investopedia.com/betterment-review-4587887) and [Wealthfront](https://www.investopedia.com/wealthfront-review-4587933), launched in 2008. Wealthfront began as a mutual fund analysis company called kaChing. It planned to assist the tech community, then realized that computer software could make investment advice more accessible. Betterment, on the other hand, began with the initial purpose of rebalancing assets within [target-date funds (TDFs)](https://www.investopedia.com/terms/t/target-date_fund.asp). It sought to help manage passive, buy-and-hold investments through a simple online interface.

Human [wealth managers](https://www.investopedia.com/ask/answers/052915/what-private-wealth-management.asp) have been using automated [portfolio allocation](https://www.investopedia.com/terms/a/assetallocation.asp) software since the early 2000s. But, until Betterment and Wealthfront launched, wealth managers were the only ones who could buy the technology, so clients had to [employ a financial advisor](https://www.investopedia.com/articles/personal-finance/011316/comparing-edward-jones-advisor-roboadvisor.asp) to benefit from the innovation.

Today, most [robo-advisors use passive indexing strategies](https://www.investopedia.com/etfs-vs-robo-advisors-7571319) that are optimized using some variant of modern portfolio theory (MPT). Typically, the account holder can't choose which mutual funds or exchange-traded funds (ETFs) to invest in or purchase individual stocks or bonds in their account.

Some robo-advisors offer optimized portfolios for specific strategies such as socially responsible investing (SRI), halal investing, or tactical strategies that mimic hedge funds. They also can handle much more sophisticated tasks, such as [tax-loss harvesting](https://www.investopedia.com/terms/t/taxgainlossharvesting.asp), investment selection, and [retirement planning](https://www.investopedia.com/terms/r/retirement-planning.asp).

## Explosive Growth

The robo-advisor industry has experienced explosive growth. According to Polaris Market Research, the robo-advisory market size was valued at $8.3 billion in 2024 and was projected to grow to $33.6 billion by 2030, according to a [CAGR](https://www.investopedia.com/terms/c/cagr.asp) study.  

## Portfolio Rebalancing

The majority of robo-advisors use modern portfolio theory (MPT) (or some variant) to [build passive, indexed portfolios](https://www.investopedia.com/robo-advisor-vs-index-funds-7568061) for their users.

Once portfolios are established, robo-advisors continue to monitor them to ensure that the optimal asset-class weightings are maintained, even after market moves. Robo-advisors achieve this by using [rebalancing bands](https://www.investopedia.com/articles/stocks/11/rebalancing-strategies.asp).

### Rebalancing Bands

In rebalancing bands, every [asset class](https://www.investopedia.com/terms/a/assetclasses.asp) or individual security, is given a target weight and a corresponding tolerance range. For example, an allocation strategy might include the requirement to hold 30% in [emerging market](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp) equities, 30% in domestic blue chips, and 40% in [government bonds](https://www.investopedia.com/terms/g/government-bond.asp) with a corridor of ±5% for each asset class.

The use of rebalancing bands means that, given the ±5% corridor, emerging market and domestic blue-chip holdings can fluctuate between 25% and 35%. Government bonds can fluctuate between 35% and 45%. When the weight of a holding moves outside of the allowable band, the entire portfolio is [rebalanced](https://www.investopedia.com/terms/r/rebalancing.asp) to reflect the initial target composition.

> **Tip**
>
> In the past, this type of subtle rebalancing was frowned upon because it was time-consuming and generated transaction fees. Now, low-fee robo-advisors are designed to handle rebalancing automatically.

### Tax-Loss Harvesting

Another type of rebalancing commonly found with robo-advisors—made cost-effective through algorithms—is tax-loss harvesting. [Tax-loss harvesting](https://www.investopedia.com/terms/r/robo-tax-loss-harvesting.asp) is a strategy that involves selling securities at a loss to offset a capital-gains tax liability.

This strategy is typically employed to limit the recognition of [short-term capital gains](https://www.investopedia.com/terms/s/short-term-gain.asp). Robo-advisors do this by maintaining two or more stable ETFs for each asset class. So, for example, if the S&P 500 ETF loses value, a robo-advisor will automatically sell it to lock in a capital loss; simultaneously, it buys a different S&P 500 ETF.

It's worth bearing in mind that the IRS [wash-sale rule](https://www.investopedia.com/terms/w/washsale.asp) prevents investors from re-purchasing the same security or a security that is substantially identical within 30 days from its sell date. However, robo-investment platforms should have algorithms in place that incorporate rules like this.

> **Warning**
>
> Make sure your robo-advisor is programmed to select ETFs appropriately so that you avoid wash-sale violations.

## Benefits of Robo-Advisors vs. Traditional Financial Advisors

The emergence of robo-advisors has broken down some of the traditional barriers between the financial services world and average consumers. Because of these online platforms, sound financial planning is now accessible to almost everyone, not just [high-net-worth individuals](https://www.investopedia.com/terms/h/hnwi.asp).

Robo-advisors are low-cost alternatives to traditional advisors. By eliminating human labor, online platforms can offer the same services at a fraction of the cost.

Most robo-advisors charge annual flat [fees](https://www.investopedia.com/terms/f/feebasedinvestment.asp) of less than 0.4% per specific amount managed, much less than the typical 1% charged by a human financial planner (or more for [commission-based](https://www.investopedia.com/terms/c/commission-broker.asp) accounts).

With robo-advisors, it's generally [easier to keep tabs on investments](https://www.investopedia.com/why-robo-advisors-might-hold-the-key-to-your-retirement-success-11776450). You can log in 24/7 as long as you have an internet connection.

It takes significantly less capital to start investing when using robo-advisors. One of the most popular robo-advisors, Betterment, has no account minimum for its basic account offering.

Robo-advisors are efficient. Before robo-advisors and online brokerage accounts, if you wanted to execute a trade, you'd have to call or meet with a financial advisor, explain your needs, and wait for them to execute your trades. Now, you can do all of that with the click of a few buttons in the comfort of your home.

Though using a robo-advisor may limit your investment options, this can be beneficial because buying individual stocks or trying to beat the market can produce poor results. On average, ordinary investors often see better results with an [indexing](https://www.investopedia.com/terms/i/indexing.asp) strategy.

> **Fast Fact**
>
> Some human advisors won't take on clients with less than $25,000, $50,000, or sometimes even $100,000 or more in investable assets.

## Limitations of Robo-Advisors

Many in the industry have doubts about the viability of digital advisors as a one-size-fits-all solution to wealth management.

Given their current technological capabilities and minimal human presence, robo-advisors [have been criticized](https://www.investopedia.com/articles/personal-finance/010616/pros-cons-using-roboadvisor.asp) for lacking empathy and sophistication.

Robo-advisors are good entry-level options if you have a small account and limited investment experience. You may find them lacking if you need services like estate planning, complicated tax management, trust fund administration, and retirement planning.

Automated services are also ill-equipped to deal with unexpected crises or extraordinary situations. For example, robo-advisors won't know if you're between jobs or dealing with an unexpected expense—your funds could be drained unexpectedly by automatic withdrawals.

A study conducted by Investopedia and the [Financial Planning Association](https://www.investopedia.com/terms/f/financial-planning-association.asp) found that consumers prefer a combination of human and technological guidance, especially when times are rough. According to the report, 40% of participants said they wouldn't be comfortable using an automated investing platform during extreme market volatility.

Robo-advisors [operate on the assumption](https://www.investopedia.com/what-to-monitor-and-what-to-ignore-in-your-robo-portfolio-11774869) that you have defined goals and a clear understanding of your financial circumstances, investment concepts, and potential investment outcomes. For many investors, that is not the case.

Pros

*   Convenient, easy access
    
*   Lower cost, low starting capital
    
*   Investment experience not required
    
*   Straightforward index investing
    
*   Growing number of valuable services
    

Cons

*   Lacks human interaction
    
*   Limited investment opportunities
    
*   Investor must define financial situation and investment goals
    
*   One-size-approach not right for all
    
*   Uneven technology standards
    

## Hiring a Robo-Advisor

Robo advisors don't all cost the same amount and offer all the same features. Each one may excel in particular areas, so it's important to do some research first. You may also consider hybrid robo-advisors, which essentially seek to combine the benefits of automated investment with human financial advice. Dedicating a bit of time to finding the right one could turn out to be one of your smartest investments.

> **Important**
>
> Compare the best robo-advisors, including fees and services, to find on that fits your unique needs.

[Opening a robo-advisor account](https://www.investopedia.com/how-to-open-a-robo-advisor-account-7973767) usually entails completing a short, risk-profiling questionnaire and evaluating your financial situation, [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp), and personal investment goals. In many cases, you will have the opportunity to link your bank account directly for quick and easy funding of your robo-advisory account.

## Target Demographic

Many digital platforms target and attract certain demographics like [Millennial](https://www.investopedia.com/majority-of-millennials-are-now-homeowners-7378138) and Generation Z investors who are technology-savvy and still accumulating their investable assets.

Younger population is much more comfortable sharing personal information online and entrusting technology with essential tasks, such as wealth management. Indeed, the marketing efforts of robo-advisory firms typically employ social media channels to reach these investors.

> **Important**
>
> To stay tuned to compliance issues with robo-advisors, check FINRA Investor Alerts and the SEC Division of Examination websites.

## Robo-Advisors and Regulation

Robo-advisors hold the same legal status as human advisors. Accordingly, they must be registered with the [SEC](https://www.investopedia.com/terms/s/sec.asp) and are subject to the same securities laws and regulations as traditional [broker-dealers](https://www.investopedia.com/terms/b/broker-dealer.asp).

Most robo-advisors are members of the [Financial Industry Regulatory Authority (FINRA)](https://www.investopedia.com/terms/f/finra.asp). You can use [BrokerCheck](https://brokercheck.finra.org/) to research robo-advisors in the same way that you would a human advisor.

Assets managed by robo-advisors aren't insured by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). That's because they are securities held for investment purposes, not bank deposits.

However, this doesn't necessarily mean clients are unprotected. For example, Wealthfront is insured by the [Securities Investor Protection Corp. (SIPC)](https://www.investopedia.com/terms/s/sipc.asp), meaning that if the company goes bust, investors will be reimbursed up to $500,000 of their invested balance. As you research robo-advisors, don't forget to check on the kind of insurance each has to protect your investment.

## How Robo-Advisors Get Paid

The primary way that most robo-advisors get paid is through a [wrap fee](https://www.investopedia.com/terms/w/wrap-fee.asp) based on [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp). While traditional (human) financial advisors typically charge 1% or more of AUM per year, many robo-advisors charge around 0.3% of AUM per year.

Another revenue stream is [payment for order flow (PFOF)](https://www.investopedia.com/terms/p/paymentoforderflow.asp). This payment (typically fractions of a penny per share) results from directing trade orders to a particular market maker. PFOF can potentially result in better execution prices for clients. Typically, robo-advisors bundle various trade orders together into large block orders executed just one or two times a day.

Finally, robo-advisors can earn money by marketing targeted financial products and services to their customers, such as mortgages, [credit cards](https://www.investopedia.com/how-do-credit-cards-work-5025119), or insurance policies. This is often done through strategic partnerships rather than advertising networks.  

> **Important**
>
> When evaluating a robo-advisor, pay attention to what asset classes and ETFs it invests in, as some are now moving away from passive index strategies and investing in somewhat riskier areas that could either outperform or underperform the market, such as "smart-beta" strategies.

## The Bottom Line

Robo-advisors leverage advances in algorithmic trading and electronic markets to [automate investment strategies](https://www.investopedia.com/automate-your-wealth-simply-with-a-robo-advisor-11778718) for ordinary investors.

Often based on modern portfolio theory, robo-advisors are able to optimize investors' [risk-return tradeoffs](https://www.investopedia.com/terms/r/riskreturntradeoff.asp) and automatically manage and rebalance their portfolios. Automation also allows for tax-loss harvesting and other strategies that were once too complex or expensive for ordinary investors.

With low fees and [small minimum balances](https://www.investopedia.com/how-much-should-you-invest-with-a-robo-advisor-11777248) required to get started, [robo-advisors may be a good choice](https://www.investopedia.com/m1-finance-vs-wealthfront-4693443) for most long-term investors and may be especially attractive to younger, tech-forward individuals.

> **Article Sources**
>
> 1.  Financial Planning Association. "[Customer Trust and Satisfaction with Robo-Advisor Technology](https://www.financialplanningassociation.org/learning/publications/journal/AUG24-customer-trust-and-satisfaction-robo-adviser-technology-OPEN)."
>     
> 2.  Tech Crunch. "[KaChing Gets $100M Under Management](https://techcrunch.com/2010/10/19/kaching-gets-100m-under-management-and-gets-all-wall-street-with-a-new-name/)."
>     
> 3.  Hayes, A. (2020). [Enacting a rational actor: Roboadvisors and the algorithmic performance of ideal types](https://www.tandfonline.com/doi/full/10.1080/03085147.2020.1782054?casa_token=eE4yf2O5OJ0AAAAA%3Ai9DGu3hnYSzO_xUESBQWqB1BIdb9PPAbsjA2QnE6KwI_V71LvkvbrQLjwChARpBosSJvhcBy1bRlSQ). _Economy and Society_, _49_(4), 562-595.
>     
> 4.  Jonathan Walter Lam. "[Robo-Advisors: A Portfolio Management Perspective](https://economics.yale.edu/sites/default/files/2023-01/Jonathan_Lam_Senior%20Essay%20Revised.pdf)."
>     
> 5.  Global Newswires. "[Trends Shaping the $33.6 Billion Robo-Advisory Services Industry](https://www.globenewswire.com/news-release/2025/02/26/3032658/28124/en/Trends-Shaping-the-33-6-Bn-Robo-Advisory-Services-Industry-2025-2030-Fintech-Evolution-Spurs-Growth-Millennial-and-Gen-Z-Investment-Trends-Propel-Usage.html)."
>     
> 6.  The American Association of Individual Investors. "[What the Evolving Robo-Advisory Industry Offers](https://www.aaii.com/journal/article/what-the-evolving-robo-advisory-industry-offers?printerfriendly=true)."
>     
> 7.  U.S. Securities and Exchange Commission. "[Wash Sales](https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales)."
>     
> 8.  Securities and Exchange Commission. "[Wash Sales](https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales)."
>     
> 9.  Harness Wealth. "[Average Fees for Financial Advisors in 2023](https://www.harnesswealth.com/articles/average-fees-for-financial-advisors/#:~:text=On%20average%2C%20you%20can%20expect,for%20a%20comprehensive%20financial%20plan.)."
>     
> 10.  VettaFi. "[Robo-Advisor Fees: What Is the True Cost](https://www.nasdaq.com/articles/robo-advisor-fees:-what-is-the-true-cost-2021-03-11)?"
>      
> 11.  Betterment. "[Our Pricing](https://www.betterment.com/pricing/)."
>      
> 12.  Smart Asset. "[The Minimum Investment for a Financial Advisor](https://smartasset.com/financial-advisor/the-minimum-investment-for-a-financial-advisor)."
>      
> 13.  Investopedia and Financial Planning Association. "[High-Tech and High-Touch: Investors Make the Case for Converging Automated Investing Platforms and Financial Planning](http://docplayer.net/36784106-High-tech-and-high-touch-investors-make-the-case-for-converging-automated-investing-platforms-and-financial-planning.html)," Page 11.
>      
> 14.  Tan Zi Yi, Noor Ashikin Mohd Rom, Nurbani Md. Hassan, Mohamad Shaharudin Samsurijan, Andrew Ebekozien. "[The Adoption of Robo-Advisory among Millennials in the 21st Century: Trust, Usability and Knowledge Perception](https://www.mdpi.com/2071-1050/15/7/6016)."
>      
> 15.  Eleonora Isaia, Noemi Oggero. "[The Potential Use of Robo-advisors Among the Young Generation: Evidence from Italy](https://www.sciencedirect.com/science/article/abs/pii/S1544612322002835)."
>      
> 16.  Financial Industry Regulatory Authority. "[Investor Alerts](https://www.finra.org/investors/alerts)."
>      
> 17.  Securities and Exchange Commission. "[Division of Examinations](https://www.sec.gov/exams)."
>      
> 18.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Robo-Advisers](https://www.sec.gov/oiea/investor-alerts-bulletins/ib_robo-advisers)."
>      
> 19.  Wealthfront. "[What Is SIPC Insurance](https://support.wealthfront.com/hc/en-us/articles/211004063-What-is-SIPC-Insurance-)?"