“Robo-advisor” is a term that’s been in the marketplace for some time now. But the definition can vary, depending on the provider. Here’s a primer.
You may have heard about the rise of new online investing platforms, or robo-advisors, designed to help individual investors reach their financial goals. If you’re interested in investing with a robo-advisor, it’s important to understand both how they work and whether they fit your needs.
Most robo-advisors are online-only, meaning you don’t work with a financial advisor to manage your money. The term “robo” here means a financial product that employs algorithms to build and maintain a detailed investment plan.
Most robo-advisors are accessible via the provider’s website, and will start by asking a series of questions to learn more about you and your financial goals. A robo-advisor can ask you about specific goals, such as saving for a house, investing for retirement, or simply building wealth through investing. It then takes your responses and applies its algorithm to suggest a portfolio, which usually consists of a mix of mutual funds and exchange-traded funds (ETFs). If you’re comfortable with the suggested portfolio and choose to start investing, you’ll fund your account through electronic transfer, mobile check deposit, wire transfer or some other means.
Note that you can expect to pay for the investment plan and management. Most robo-advisors charge investors a fixed management fee that is usually calculated as a percentage of your current account balance. The advisory fee does not include, and is in addition to, the fees you pay to the companies providing the mutual funds and ETFs.
Robo-advisors can provide an easy introduction to investing and saving for your goals. Choosing and monitoring your investments on your own can be complicated and time-consuming. Seeking financial advice from a professional usually requires a relatively high minimum portfolio balance. A robo-advisor can be a good first step toward working with a financial advisor, as your asset mix, investment goals and individual or family financial needs grow more complicated. Here’s a breakdown of some other benefits available for robo-advisor accounts as well as in typical advisory relationships:
Active/Passive investment options: Some robo-advisors can give you access to both active and passive investment strategies. Active investing involves using human portfolio managers to harness research and their own experience to pick and choose investments, with the goal of “beating the market,” or outperforming certain market benchmarks. If you’re a passive investor, your goal is to match the performance of certain market indexes, such as the S&P 500 index, through market tracking portfolios.
Rebalancing your portfolio: After you open your account, your robo-advisor will build a portfolio comprising a mix of different investments, the balance of which may “drift” over time due to contributions, withdrawals and market conditions. A robo-advisor can automatically rebalance your investments to help your portfolio stick to its target asset allocation.
Tax-loss harvesting: Taxes can take a bite out of your investment returns. Some robo-advisors can monitor your account to find potential for tax-loss harvesting opportunities and make those moves automatically.
Theme investing: You may want to invest in sectors that you like or causes you care about. Some robo-advisors let you focus some of your money into themes based on interests, such as climate action, robotics or gender diversity. This type of focus is often referred to as an investment or portfolio “tilt.”
If you are just getting started with investing, you may also be considering a self-directed brokerage. With one of these accounts, you pick what securities to invest your money in, and make any subsequent buying or selling decisions.
If you have substantial assets, have complicated finances or are saving for a number of different financial goals, you may want to work with a Financial Advisor instead of a robo-advisor. You can find one at MorganStanley.com.
Robo-advisors can be a good solution for investors who are starting out and don’t have a lot of money to invest, or who don’t have the time or desire to manage their own finances and like the idea of managing their money online.
Access Investing from Morgan Stanley is our answer to a robo-advisor, backed by more than 80 years of expertise. The experts in Morgan Stanley’s Global Investment Committee drive all our asset allocation decisions. To invest, you’ll tell us about your goals, answer a few simple questions, and our algorithm will do the rest, providing a detailed investment plan to help you get there. You can invest for particular goals, including your retirement, or simply to build your wealth, and also tilt a portion of your investments toward various themes, including climate action and defense & cybersecurity.