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  • Writer's pictureWiseWallet

Robo-Advisors: The Essential Guide

Updated: Jun 24

Many readers of have embraced the DIY (Do It Yourself) approach to investing, focusing on well-known ETFs and mutual funds for their simplicity and low costs. However, we covered the topic of financial advisors for those who may be curious about hiring a financial advisor due to unique circumstances or specific financial goals. Today, we are going to introduce Robo Advisors and cover the benefits and potential downsides.


What Are Robo-Advisors?

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, then uses the data to offer advice and/or automatically invest client assets.


How Do They Work?

Robo-advisors use algorithms and modern portfolio theory to manage investments. Here's a step-by-step breakdown of the process:

  • Initial Setup: Users create an account and fill out a questionnaire about their financial goals, risk tolerance, and investment horizon.

  • Portfolio Recommendation: Based on the responses, the robo-advisor suggests a diversified portfolio of low-cost ETFs (Exchange-Traded Funds).

  • Automatic Management: The platform automatically manages the portfolio, including rebalancing and tax-loss harvesting, to maintain the desired asset allocation and optimize for tax efficiency.

  • Continuous Monitoring: The system continuously monitors the portfolio's performance and adjusts as necessary to align with the user’s goals.


Popular Platforms

Betterment and Wealthfront are two most popular robo-advisors. Both share several features that make them appealing options for investors looking for automated investment management. They both charge a low annual advisory fee of 0.25%, which is significantly lower than traditional financial advisors. Both platforms offer tax-loss harvesting to help reduce tax liabilities on taxable accounts and automatically rebalance portfolios to maintain the desired asset allocation. They use ETFs to create diversified portfolios based on the user’s risk tolerance, goals, and investment horizon. Additionally, both offer high-yield cash accounts and cash management services with FDIC insurance through partner banks. Finally, they provide financial planning tools.


So What? - The Benefits and Downsides of Using Robo-Advisors


  • Cost-Effective: Robo-advisors typically charge lower fees compared to traditional financial advisors. This makes them accessible for those with smaller portfolios​.

  • Accessibility: With low or no minimum balance requirements, robo-advisors are a great starting point for new investors​.

  • Automation: They offer automatic portfolio rebalancing and tax-loss harvesting, ensuring your investments stay aligned with your goals without constant manual intervention​.

  • Comprehensive Services: Platforms like Betterment and Wealthfront provide additional features such as financial planning tools and cash management services, offering a one-stop-shop for financial needs​.



  • Limited Human Interaction: Robo-advisors typically offer limited access to human financial advisors. This can be a disadvantage for those who prefer personalized advice or have complex financial situations​.

  • Customization Constraints: While robo-advisors offer some level of customization, they may not cater to highly specific investment preferences or strategies that a traditional financial advisor could accommodate​.

  • Market Dependence: Like all investments, robo-advisor portfolios are subject to market risks. Automated strategies may not adapt quickly to sudden market changes or downturns​.

  • Service Limitations: Some features, such as personalized financial planning, are only available in premium tiers, which come at a higher cost. This may limit the benefits for users who stick to the basic plans​.


Now What? - Recommendations for Investors

Evaluate Your Needs: Is a Robo-Advisor Right for You?

Consider whether a robo-advisor aligns with your financial goals and preferences. Robo-advisors are great for those who prefer a hands-off approach and are comfortable with automated investment management. They are cost-effective and can be an excellent choice for those with simpler financial needs. However, if you require personalized advice or have complex financial situations, you might benefit more from a traditional financial advisor.


If You Like Robo-Advisors, Choose the Right Platform

Choose Betterment if...

  • You have low balances: Betterment requires no minimum balance to start investing.

  • You are a retirement investor: Betterment offers various retirement account options.

  • You are more hands off investor: Betterment simplifies investing with its automation and easy setup process.

  • You like better customer service: Betterment’s customer service is easier to access. For example, Wealthfront's phone customer service number is less publicized and there is no online chatbot.

Choose Wealthfront if...

  • You have taxable accounts: Wealthfront has created two sets of portfolio allocations–one for taxable accounts, and one for retirement accounts. Wealthfront's has more options for portfolio customization, including individual stocks, than Betterment.

  • You want free and extensive financial tools: Wealthfront offers comprehensive financial planning tools, such as its excellent Path digital financial planning tool. You don’t even have to invest with Wealthfront to access it.

  • You are interested in 529 college savings plan management: Wealthfront offers specialized features for managing college savings plans.

  • You prefer a mix of DIY and automated investing: Wealthfront allows for both customized and automated investment strategies​


Start Small

If you’re new to investing, take advantage of the low or no minimum balance requirements to start small. This allows you to become comfortable with the platform and its features without committing a large sum of money initially.


Regularly Review

Even though robo-advisors handle the heavy lifting, it’s essential to periodically review your financial goals and ensure that your chosen platform continues to align with them. Regular reviews help you stay on track and make necessary adjustments as your financial situation or goals evolve.


Concluding Remarks

Robo-advisors have revolutionized the way individuals invest by providing accessible, cost-effective, and automated investment management solutions. By leveraging technology, platforms like Betterment and Wealthfront offer robust features that cater to both novice and experienced investors. As you consider your investment options, evaluating these platforms based on your financial goals and preferences can help you make an informed decision.



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