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What's a robo advisor, and how does it work?

Key takeaways

  • Robo advisors use technology to manage investments on your behalf using a strategy built around your goals and preferences.
  • While costs can vary, robo advisors are typically a more affordable option than traditional investment management.
  • Some robo advisors offer additional financial guidance and planning, creating a hybrid of digital and human support.

Between researching investments, monitoring the markets, and managing your portfolio, investing might sound like a full-time job. Enter the robo advisor: a simple and relatively inexpensive way to get help building an investment strategy and putting it into action.

What is a robo advisor?

A robo advisor is an affordable digital financial service that uses technology to help automate investing, based on information investors provide about themselves including their risk tolerance and financial situation.

No, it's not an actual robot advisor and, yes, there are still humans involved. "Robo" refers to these services being almost completely digital. "Advisor" covers all the human advisors behind the scenes who offer digital investment advice and account management services for investors. Thanks to automation, robo advisory services are often offered for a lower fee than traditional investment management.

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How do robo advisors work?

Most robo advisors use different pieces of information about an investor to suggest an investment strategy, then create and maintain a portfolio that aligns with that strategy.

In most cases, you'll first be asked some questions—online or through an app—about yourself, your current financial situation, and your goals, or what you're investing for and when you need the money. You'll also be asked about your tolerance for investment risk, or how comfortable you are with market ups and downs. A robo advisor then uses that information to suggest a mix of different types of investments to help support your goals and objectives. After that, your portfolio is basically on autopilot: The robo advisor keeps an eye on things for you and typically rebalances your account by automatically buying and selling investments to help keep you on track over time.

What is a hybrid robo advisor?

While a robo advisor account is managed mostly online or through an app, a hybrid robo advisor is a service that typically combines a robo advisor with live, personalized financial coaching. This means you'll have a chance to ask questions, exchange ideas, and discuss your goals with a real person. For many hybrid robo advisors these conversations happen by phone rather than in-person. By meeting over the phone, these services can come at a lower cost than meeting in person with a traditional financial advisor. Still, a hybrid robo advisor might cost more than a robo advisor alone.

Fidelity's robo advisor, Fidelity Go®, offers hybrid robo advisory services for a fee of 0.35% a year for those with balances of $25,000 or more.

How much does a robo advisor cost?

It depends. Typically, robo advisors will charge what's called an advisory fee, which is usually a percentage of the money you have invested. Again, robo advisors generally have a much lower advisory fee than a traditional managed option because they cost less to operate. Minimum investments can be kept low too, potentially making robo advisors a good option for beginners. (Fidelity Go charges no advisory fees on account balances less than $25,000 and requires no minimum to open an account and only $10 to start investing).

Depending on the investments in your managed portfolio, you may pay additional management fees on certain investments—such as mutual funds and ETFs—in addition to your robo advisory fees, which can add to the total amount you pay. That's why you should research different robo advisors to see what types of investments they offer and whether those come with any additional fees. Fidelity Go, for example, uses a combination of mutual funds that don't charge management fees.

Can a robo advisor help manage the risk that comes with investing?

All investing involves risk and the potential to lose money due to inevitable fluctuations in the markets that happen over time. A robo advisor can help manage some of that risk in 3 ways: First, it helps strengthen your portfolio through diversification, which means spreading your money around to different investments to potentially reduce your risk of losing all your money if one investment fails (though diversification does not ensure a profit or guarantee against loss). Robo advisors suggests an appropriate mix of stocks, bonds, and short-term investments based on your personal goals and risk tolerance. Second, it monitors and analyzes the markets, so you don't have to. Finally, robo advisors automatically rebalances your investments when changes are needed due to market conditions or other factors to help your portfolio stay on track. Especially if you're new to investing, having pros manage things for you could potentially be a less risky option than trying to research and make decisions yourself.

How do I know if a robo advisor or hybrid robo advisor is right for me?

If you agree with the statements below, a robo advisor might be right for your current situation:

  • I'm saving for something 3 or more years away and I'm looking for an affordable, professionally managed account so that my money is invested instead of just in a savings account.
  • I'm willing to pay a fee for someone to make investment decisions for me.
  • I want to be able to access and interact with my account online, so I can track the progress of my investments whenever I want.
  • I'm comfortable having someone else automatically rebalance my portfolio (when needed) so that it stays in line with my investment goals.

    If you think you'd benefit from having access to a professional financial advisor by phone, you may want to consider a robo advisor that has a hybrid option for help with investing and basic financial planning.

How do I invest with a robo advisor?

When choosing a robo advisor, it's important to research options to find a service that matches your financial goals and preferences. Not all robo advisory services are alike and some may not be the right fit for every investor. Compare advisory fees, investment minimums, and investment types available to you. Understand what level of financial guidance you can expect, whether online or with a live person.

When you're ready, you'll be asked to open an account—or convert an existing one, such as a retirement or brokerage account—and transfer funds into it to begin investing. You'll be asked those questions mentioned above about your goals, risk tolerance, and financial situation to help create your investment strategy. Once you're comfortable with a recommended strategy, you can let the robo advisor do the investing for you.

Smart automation can make investing easy

Fidelity Go® offers low-cost professional money management.

More to explore

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Generally, among asset classes stocks are more volatile than bonds or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities including leveraged loans generally offer higher yields compared to investment grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market or economic developments, all of which are magnified in emerging markets.

Fidelity Go® provides discretionary investment management, and in certain circumstances, non-discretionary financial planning, for a fee. Advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, FBS and NFS are Fidelity Investments companies.

Fidelity and Fidelity Go® are registered trademarks of FMR LLC.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917