Quick answer
A robo-advisor (US regulators write robo-adviser) is an automated digital investment advisory programme. It uses your answers to an online questionnaire about goals, time horizon and risk tolerance to build and manage a portfolio[1], typically as a registered investment adviser[3].
Key points
- It is an online service where algorithms, not a person, pick and manage your investments.
- It learns about you through a short questionnaire, so the advice depends on how complete your answers are.
- In the US it is typically a registered investment adviser and owes clients a fiduciary duty.
On this page
#What does a robo-advisor do?
A robo-advisor asks you questions about your financial goals, investment horizon, income and other assets, and how much risk you can accept, then creates and manages a portfolio based on those answers[1]. Behind the scenes it chooses an asset allocation (the split between shares, bonds and cash), buys funds to match, and rebalances when markets push the mix away from target. FINRA, the US brokerage self-regulator, lists the typical functions as customer profiling, asset allocation, portfolio selection, trade execution, rebalancing, tax-loss harvesting and portfolio analysis[2]. The full walk-through is in what is a robo-advisor?.
#Is a robo-advisor regulated like a human adviser?
In the US, yes in most cases. The SEC's Division of Investment Management says robo-advisers are typically registered investment advisers and "are subject to the substantive and fiduciary obligations of the Advisers Act"[3]. You can look a firm up on the SEC's Investment Adviser Public Disclosure site and read its Form ADV before investing[1]. For how the duties compare in practice, see robo-advisor vs financial advisor.
Worked example
Example
Maya, 24, invests $5,000 through a robo-advisor. She answers ten questions, says she will not need the money for 30 years and can accept large swings, and the service suggests a portfolio mostly in share funds with a small bond slice. If it charges a hypothetical 0.25% a year, her fee on $5,000 is $12.50 (computed with code), plus the costs of the funds themselves. When shares rise and the mix drifts, the software sells a little of the shares and buys bonds to bring it back to target.
#What is a robo-advisor not?
It is not a trading app where you pick each share yourself, and it is not a guarantee: the portfolio holds real investments that can fall in value. It is also not the company that holds your assets; that is usually a separate custodian, often a bank or broker-dealer.
Frequently asked questions
Why do some sources write 'robo-adviser'?
US regulators such as the SEC use the spelling 'robo-adviser'[1]. 'Robo-advisor' means the same thing.
Can I speak to a person at a robo-advisor?
Sometimes. Services range from hybrid models with access to financial professionals to technical support only[1].
Sources
- Investor Bulletin: Robo-Advisers — US Securities and Exchange Commission (Investor.gov), 2017 Primary
- Report on Digital Investment Advice — FINRA, 2016 Primary
- IM Guidance Update No. 2017-02: Robo-Advisers — US Securities and Exchange Commission, Division of Investment Management, 2017 Primary
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