Is a Robo-Adviser Right for Your Retirement?​

The chief downside of robo-advisers, Johnson says, is limited capacity to customize your portfolio, a potential concern for investors with unique or complex financial needs. 

“They are largely a one-size-fits-all solution,” he says. “If two individuals are of the same age and indicate that they have the same risk tolerances, robo-advisers will provide similar solutions.” 

How do robo-advisers work?

Different robo-advisers may offer slightly different user experiences, but their core operations are largely similar across the board. Common services include: 

• Risk assessment. Upon signing up, you’ll be prompted to take a questionnaire regarding your risk tolerance, financial goals and investment timeline — for example, how long before you plan to retire and need to tap your assets.
• Portfolio construction. Based on your answers, your robo-adviser will curate a portfolio featuring diversified investments with asset allocations suited to your financial aims.
• Portfolio management. The robo-adviser will automatically adjust your asset allocation over time to keep it aligned with your risk profile and long-term goals. For instance, it might suggest a more conservative portfolio, with less money in stocks and more in bonds or cash, as you approach retirement. 
• Tax benefits. Some robo-advisers offer tax-loss harvesting capabilities, selling your investments at a loss to offset capital gains and lower your tax liabilities.

Robo-advisers usually advertise their fees, account minimums and investment philosophy on their websites. You may also want to compare features such as financial planning tools, access to human advisers and specialized portfolio options such as socially conscious investing, which may cost more, depending on the provider.

Once you’ve selected a platform and completed the sign-up process, you must answer a few questions to create your personalized portfolio. Carefully review the proposed investments and asset allocation to ensure they meet your expectations. 

Is a robo-adviser right for you?

There are pros and cons to using automated advisers. On the plus side, if you’re interested in low-cost, hands-off account management, they offer:

• Ease of use. Robo-advisers are known for their user-friendly interface and straightforward setup process, making it easy for beginners to start investing without requiring significant financial knowledge or prior experience.
• Affordability. You can expect to pay significantly lower management fees — generally, between 0.25 percent and 0.5 percent of your portfolio’s value per year, compared with 1 percent to 2 percent for a traditional financial adviser. If you have $10,000 invested, that means fees of $25 to $50 a year rather than $100 to $200.
• Low account minimums. Some traditional financial advisers require you to have $100,000 or more in assets to start investing with them. Many robo-advisers require little initial investment to open an account. Several have no minimum, and $100 to $500 is not unusual, although larger firms like Vanguard and Charles Schwab require several thousand dollars to get started. 
• Convenience. Investing with a robo-adviser allows you to bypass the in-person consultations and lengthy paperwork required by financial advisers. You also have 24/7 access to your portfolio online; traditional advisers may have limited availability. 

There are significant trade-offs, though. With robo-advisers, you get: 

• Limited human involvement. Traditional financial advisers provide face-to-face interaction and personalized guidance. They can quell anxiety and help you make informed decisions during life changes or periods of market volatility. 
• Fixed investment strategies. Robo-advisers allocate your funds into predesigned model portfolios. Traditional advisers can adjust investments based on your unique and evolving needs and take advantage of market conditions to maximize your returns. 
• Limited investment options. Robo-advisers typically invest your money in traditional assets like exchange-traded funds (ETFs) and mutual funds. They lack the capacity to invest in alternative assets like private equity or hedge funds. 
• Fewer services. Human advisers can offer guidance on things like retirement strategy, estate planning and charitable giving. Robo-advisers are largely limited to managing investments, which may not be sufficient for more affluent investors in need of tailored advice.

For investors seeking the best of both worlds, emerging hybrid models may provide a solution, says Brian Kuhn, senior vice president and financial adviser at Wealth Enhancement Group.

Major players such as Charles Schwab, Vanguard and TD Bank offer hybrid wealth management services that provide more personalization than robo-advisers, but are still more cost-effective than working exclusively with a traditional adviser.  

“This is due to the industry trying to accommodate customer demand,” Kuhn says. “It also presents an opportunity to introduce broader planning services to those clients if they decide they want or need more help.” 

“The future of financial planning and wealth management will likely involve a blend of robo-advisers and human advisers, each playing to their strengths to serve the diverse needs of investors,” says James Allen, a certified financial planner and founder of Billpin.com, which provides reviews and guides on personal finance apps and tools."