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Money Basics: What is a robo-advisor?

Welcome to Money Basics, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important terms involving your money.

Over the past decade, digital investing platforms known as robo-advisors have grown in popularity, aided by the emergence of several new fintech startups.

Robo-advisors like Betterment use algorithms to give you investment advice or to invest for you automatically — all with little or no human interaction.

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.

Meanwhile, Betterment has a digital plan with a fee of just a quarter of one percent, while traditional advisors tend to charge at least 1% of assets managed.

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.

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• What’s the NASDAQ?
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