While some investors like taking an active role in helping grow their money, others prefer a more hands-off approach. That's where robo advisors and target date funds come in. Both can help take some of the legwork (and complexity) out of investing, but they go about it in different ways. Here's the rundown on a robo advisor vs. target date fund—along with help for determining which investing option might be better for you.
What is a robo advisor?
A robo advisor is a digital financial service that uses technology and investor-provided information to help automate investing. Although you might see the word "robo" and assume it's a completely automated process, depending on the product, you may not be working entirely with an actual robot advisor. Some robo offerings, like Fidelity Go®, use real humans behind the scenes to deliver digital investment advice and account management services to investors.
Here's how a robo advisor typically works.
- First, you answer some basic questions about your finances. Most robo advisors work off your financial goals, risk tolerance, and investment timeline. Your responses help the robo advisor suggest a mix of different types of investments to help support your goals and objectives.
- Next, allow the robo advisor to do its thing. The robo advisor will manage your investments according to an investment strategy. For example, Fidelity Go manages based on your selected investment strategy and will check in on your investments to make sure the market ups and downs haven't made your portfolio too heavy or light in any type of investment. Fidelity Go will then buy and sell investments to keep you at the right level of risk through a process called rebalancing.
A quick look at robo advisors
Here are some important things to know about robo advisors.
- They are professionally managed accounts. Robo advisors manage your investments, which may include rebalancing and regular check-ins. Depending on the level of service, they take the investing work off your plate.
- You'll get a personalized investment strategy. Financial goals aren't one-size-fits-all. Robo advisors are able to better customize an investing strategy for your specific financial needs and time horizon.
Fidelity Go, Fidelity's robo advisor service, is an investing solution that offers robo advisory services for $0 in advisory fees for balances under $25,000—and only 0.35% for balances $25,000 or more. Plus, there's no minimum to open an account, and only $10 to get invested.1
What is a target date fund?
Target date funds (TDFs) are ready-made, professionally managed, diversified portfolios designed for a future savings goal that gradually adjust their mix of investments as the target date approaches. For example, a 25-year-old who plans to retire in 40 years might choose a target date 2065 fund. Target date funds are commonly used for retirement savings, and they're available through many 401(k)s and IRAs. Target date strategies can also be held in 529 college savings plans, where the target date is often the year the investor anticipates a child starting their higher education.
Target date funds are portfolios that gradually become more conservative as you get closer to your target date. The 25-year-old we just mentioned would have greater equity exposure in their portfolio because of the long-term growth potential that equities offer. However, downside risk management becomes more important as an individual moves closer to their expected retirement date, for example, so someone 10 years from retirement may benefit from lower equity exposure and more diversified fixed income exposure in their portfolio.
There are also many different types of target date funds with different investment strategies. There are active and blend TDFs that are actively managed and have the flexibility to deviate from strategic allocations based on the manager's views of the markets, and index TDFs that stay in line with the strategic glide path allocations. There are also TDFs focused on saving goals other than retirement, like education savings.
Keep in mind that a target date fund is a non-advisory solution. That means that no advisor checks in with the investor. Instead of having a portfolio designed for you, you select a portfolio aligned with your investment timeframe. These funds are focused on providing a preferable option for investors who have financial needs tied to a specific date.
A quick look at target date funds
Here are some important things to have on your radar about TDFs.
- They are diversified single-portfolio solutions. TDFs invest across a variety of assets to help mitigate risk while still offering growth potential.
- Asset allocation is professionally managed. Portfolio managers will gradually adjust the TDF's investment mix as the target date approaches. This provides the potential for growth while shielding you from undue risk, especially when you're nearing your "I need this money" date.
- There are different types of TDFs. Active and blend TDFs have flexibility to alter asset allocations based on the manager's views of the market environment. Index TDFs are designed to stay in line with the strategic glide path allocations.
Fidelity Freedom® Funds are TDFs that can help you keep your money on track with your financial retirement goals.
Robo advisor vs. target date fund
Deciding to invest through a robo advisor or target date fund can be tricky. The right investment strategy for you will depend on your personal financial situation, risk tolerance, and how involved you want to be when investing.
Both robos and TDFs can rebalance your portfolio and change the assets you're invested in as time moves forward. A robo advisor also usually allows more personalization to your specific situation, like the ability to change your investment time horizon, if needed. One drawback is that certain retirement accounts, like 401(k)s, may not allow you to invest through a robo advisor. Some robo advisors even allow you to switch to a new strategy any time you want to. With Fidelity Go's Smart Shift feature, Fidelity does it for you automatically if your goal changes or as your target date approaches. On the other hand, TDFs are focused on a specific goal, like saving for retirement or education. The strategy of a specific TDF is focused on a specific anticipated year you'll need that money. If you're looking for an investment option that could take work off your plate, it's smart to consider both TDF and robo advisors with your time horizon, investing goals, and risk tolerance in mind.