A robo-advisor offers a quick and easy way to create an investment portfolio based on your specific goals. Here’s a primer.
You may have heard about the rise of new online investing platforms, or robo-advisors, designed to help individuals reach their financial goals. If you’re considering these platforms, it’s important to understand both how they work and whether they fit your needs.
Most robo-advisors are online-only, meaning they don’t involve working with a Financial Advisor to manage your money. In this context, “robo” refers to 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, such as saving for a house, investing for retirement or simply building wealth. They then take your responses and apply algorithms 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 its management. Most robo-advisors charge investors a fixed management fee that is usually calculated as a percentage of your current account balance. This advisory fee does not include, and is in addition to, any fees you pay to the companies providing the mutual funds and ETFs. Generally, robo-advisory fees tend to be lower than fees paid to Financial Advisors.
- Ease: Choosing and monitoring investments on your own can be complicated and time-consuming, and seeking financial advice from a professional usually requires a relatively high minimum portfolio balance. Robo-advisors, on the other hand, can provide an easy, cost-efficient introduction to investing toward your goals, with algorithms taking the guesswork out of selecting individual securities, and usually lower minimum balance requirements making the markets more accessible. As your asset mix, investment objectives and financial needs grow more complicated, you may transition to working with a Financial Advisor, but a robo-advisor can be a great first step.
- 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, through market-tracking portfolios.
- Rebalancing done for you: After you open your account, your robo-advisor will build a portfolio made up of a mix of 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.
- Thematic investing: You may want to invest in what matters to you. Some robo-advisors offer more personal choice, letting you allocate some of your money toward specialized themes like climate action, robotics or gender diversity. This type of focus is often referred to as an investment or portfolio “tilt.”
Robo-advisors can be a good option for investors who:
- are just starting out,
- don’t have a lot of money to invest,
- don’t have the time or desire to manage their own finances, or
- like the idea of managing their money online.
Carefully consider your situation, preferences and goals before you choose any investment strategy or platform.
If you are just getting started with investing, you may also consider a self-directed brokerage account, which allows you to pick which securities to invest in and make any subsequent buying or selling decisions.
If you have substantial assets or complicated finances, or you 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.
Access Investing from Morgan Stanley is our answer to a robo-advisor, backed by more than 80 years of investing excellence. We run thousands of simulations to arrive at a diversified portfolio designed to help you achieve your objectives, whether that’s preparing for retirement, saving for education expenses or growing your wealth.