Welcome to Money Basics, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important terms involving your money.
When you set up an account with a robo-advisor, you’ll provide detailed financial information along with your short- and long-term goals as well as how much risk you want to take. The algorithms use this information to invest for you or give you financial advice.
Robo-advisors also base their investment decisions on current market conditions. For example, if the stock market goes up, your robo-advisor might sell some of the stocks in your portfolio and invest the money in other assets.
Robo-advisors have a couple of key advantages: Because they don’t have to employ many people, they typically have lower fees and lower account minimums than traditional investment advisors. Some robo-advisors like Betterment, WiseBanyan, and Blooom even have no account minimums.
Of course, robo-advisors have drawbacks. For one thing, you can’t rely on a robo-advisor to do complicated financial planning or to give you legal advice. Moreover, a robo-advisor won’t be able to give you the kind of nuanced financial advice that a human being might be able to provide.
Perhaps that’s why companies like Charles Schwab are launching hybrid robo-advisors — companies that automate certain features of financial planning but let you talk to a human being when it makes sense for you.