Robo Investing

Figuring out how to start investing can feel like a daunting task. Learning how to evaluate individual stocks can feel overwhelming. However, you might not have to do the heavy financial planning if you use robo investing as a way to build your portfolio. A robo advisor is a hands-off approach to managing your portfolio based on your timeline and investing goals. Let’s take a look at what robo investing is, as well as the pros and cons, so you can decide if this approach is right for you.

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Table of Contents

What is robo investing?

The idea behind robo investing is to automate investment decisions. That way, with automated investing, you do not have to go through the work of researching and choosing individual equities. It’s all handled for you through a computerized process.

Origins and background of robo investing

With robo investing, a computer algorithm uses information about you and builds a  stock portfolio on your behalf. Many robo advisors use exchange-traded funds (ETFs) to accomplish this task. 
Using computer-assisted portfolio management isn’t new. In fact, portfolio management software had been available to wealth managers since the early 2000s. The difference? Investors couldn’t access this software to manage their accounts. 

The first brokerages to offer robo investing services were Betterment and Wealthfront. They began offering services to consumers in 2008. The idea was that a consumer could set aside the same amount of money each month and the robo advisor would take that money and invest it. ETFs are usually used, dividing money between stock and bond funds.

How robo investing works

When you open an account with a robo advisor, you provide your basic information. You usually answer a questionnaire designed to test your risk tolerance. You can also establish a timeline for your goals. 
Once you fill out the questionnaire, the algorithm determines what asset allocation of stock and bond index ETFs is likely to work best for you. Next, you decide how much money you can set aside each month. You have that amount transferred from your bank account to your investment account. Then, the robo advisor invests the assets according to the asset allocation.
For example, you decide to invest 500 pounds a month with an asset allocation of 70% stocks and 30% bonds. Out of that, 350 pounds will go toward stock funds while the remaining 150 pounds go toward bond funds.

Different robo investing strategies

Many robo advisors subscribe to the principles of modern portfolio theory (MPT). This states that asset allocation is more important than the individual investments or securities are chosen for a portfolio. However, there are some different strategies robo advisors use to tweak results. This is based on different characteristics that an investor might have.

Passive indexing

With passive indexing, robo advisors create a portfolio using index ETFs. These index ETFs are passively managed and based on specific indexes, such as the S&P 500 or the Russell 2000. Index ETFs can be geographically diverse as well. This includes emerging market bond securities or an all-world stock index. 
Index ETFs are often very cost-efficient. Instead of a manager deciding what assets to include, an index ETF instead relies on tracking an underlying index.

Optimised portfolios

Depending on the robo advisor’s “financial advice”, it might be possible to get an optimised portfolio, with assets aimed at specific goals. Some advisors offer socially responsible options and others offer access to Halal investing. An optimised portfolio can be one way to adhere to certain principles to achieve your financial goals.

Tax-loss harvesting

Some robo investing providers offer tax-loss harvesting in the U.S. This strategy focuses on tax efficiency. Some robo advisors manage which types of accounts the assets go into to take advantage of tax benefits.

Passive indexing

With passive indexing, robo advisors create a portfolio using index ETFs. These index ETFs are passively managed, based on specific indexes, such as the S&P 500, Russell 2000, Dow Jones Index or even a bond index ETF. Index ETFs can be geographically diverse as well, including emerging market bond securities or an all-world stock index. 

Index ETFs are often very cost-efficient. Instead of a portfolio manager deciding what assets are included, an index ETF instead relies on what is tracked by the underlying index.

Optimised portfolios

Depending on the robo advisor, it might be possible to get an optimised portfolio, with assets aimed at specific goals. For example, some advisors offer socially responsible options and others offer access to Halal investing. If you want to meet specific goals and support certain principles, an optimised portfolio can be one way to go.

Tax-loss harvesting

In the United States, some robo investing providers offer tax-loss harvesting, which can help you reduce your overall tax liability. This strategy involves making sure that, when you sell assets, those that have the best tax efficiency are taken care of. Additionally, some robo advisors manage which types of accounts the assets go into in order to take advantage of tax benefits.


Another strategy robo advisors use is automatic rebalancing. When you open a robo investing account, you usually choose an asset allocation that fits your strategy. If you don’t choose your own allocation, the robo advisor might choose one for you, based on your risk profile and timeline. 

As you approach a goal, like retirement, the robo advisor will automatically shift some of your assets. It might sell some stocks and use the proceeds to buy bonds. Additionally, if your asset allocation strays beyond a certain percentage, such as 5%, the robo advisor might automatically rebalance to bring your portfolio in line.


What are the attractions of robo investing?

There are some good reasons that some investors are attracted to robo investing. Robo investing offers the opportunity to learn about investing while taking advantage of low fees.

Low-cost investment gain

In general, robo advisors charge relatively low management fees. It’s fairly common for more traditional wealth advisors to charge at least 1% of the assets under management. However, many robo advisors charge less. In Europe, it is possible to find fees at around 0.8% of invested capital, while U.S.-based robo advisors often charge 0.4% or less – way better than any interest rate!

There are still expense ratios associated with the index ETFs, but index ETFs usually have much lower fees than their actively-managed counterparts. In fact, passively-managed fund fees are right around 0.12%, while actively-managed funds are closer to 0.62%.

Between the lower management fees and lower expense ratios on the EFTs used to construct investor portfolios, it is possible to keep more of those investment gains. Fees represent lower real returns. Therefore being able to get portfolio management help from an algorithm and keep more of your gains is a major attraction of robo investing.

Provide a chance for investors to learn

Another reason robo investing can be attractive — especially to beginning investors — is the fact that there’s no necessary learning curve. If you plan to invest in individual equities or engage in active trading, it’s important to learn a number of concepts and strategies. This can feel overwhelming. Plus, while you are learning, you are not investing and missing out on opportunities for portfolio growth.

Robo investing can take away the heavy lifting

With robo investing, you can set money aside regularly and someone else does the heavy lifting. It’s a way to get started and make sure your money is working for you while you learn about other investing concepts. You can begin investing without a steep learning curve and then when you have more knowledge, you can try other methods. 

Additionally, many robo advisors also offer newsletters. These can give you insights into how the market works. This can help you learn and prepare without the opportunity cost that comes when your money isn’t invested.

What are the pros and cons of robo investing vs investing your own money?


Less knowledge is required to robo invest  You don’t need as much knowledge when you robo invest. Instead, you send your money and the algorithm takes care of it. When investing your own money, you need to research and learn about different strategies and concepts first.

Low fees Depending on the situation, you might have lower fees when you use robo investing versus an investment advisor. Some brokerages and self-directed accounts have higher annual fees. You might also have to pay transaction fees. 

Time-tested investment portfolio theory MPT is a Nobel-winning concept and many robo-advisors incorporate elements of it into their approach. With robo investing, you get access to that.

Set it and forget it approach  With robo investing, the assumption is that you will leave the money in your portfolio and it will grow over time. You can continue to use dollar-cost averaging and just forget about the need to check your portfolio every day.

Access to human advice if needed  Depending on the robo advisor service, you might be able to get some human interaction and help if needed. Some robo advisors can help you create plans for specific goals.


Not completely personalized Even though robo advisors do tailor portfolios based on algorithmic representations of your risk profile and timeline, they are not completely personalized. You can create your own investing plan when you invest your own money.

Limited investment choices  With a robo advisor, you won’t have as many choices. When you invest your own money, you can choose individual equities, options, and other assets that might provide you with the potential for higher returns.

Less control  You also have less control over your portfolio when you use robo investing. By investing your own money, you have complete control.


What is the difference between robo investing and actively managed funds?

Robo investing relies heavily on index ETFs as an investment product. These are broad-based ETFs that have specific characteristics. As long as a security is listed on the index, the ETF includes it. On the other hand, actively managed funds are comprised of assets chosen by a human manager. As a result, they are more likely to actually underperform the related benchmark index. 

Additionally, passive funds, like index ETFs, often have much lower costs than actively managed funds. As a result, you might see better overall returns and results with robo investing than you would with active management by a human.


Who are the major robo investing providers?

Getting started with robo investing is fairly straightforward. There are many robo investing providers in Europe and in the U.S. Here are some of the best robo advisors.


One of the most-downloaded robo investing brokerage accounts apps in Europe, ETFmatic has been around since 2014. In addition to a free simulation account, this app offers simplicity and an intuitive experience. Additionally, there is a high degree of fee transparency with EFTmatic.

Even though ETFmatic has a number of good features, it also has a high minimum. You must have 1,000 in whatever currency you’re working with — euro, pound, or dollar.


Based in Germany, it’s possible to get started investing with as little as 100 euros with easyfolio. You can choose from three different simple asset allocations, based on your goals. There’s a portfolio for stability, one that focuses on a defensive strategy, as well as one aimed at growth and that is a little more aggressive. 

While the cost is low, easyfolio is available in Germany, but not in the U.S. or U.K. It’s not widely available.

Indexa Capital 

Even though Indexa Capital is based in Spain, it’s available to European investors, except those located in Malta and Cyprus. Indexa Capital features low costs and good transparency. Indexa has been around since 2015 and offers the ability to set up automatic investing and take advantage of index funds with a low minimum.


The largest digital wealth manager in the U.K., Nutmeg makes it easy to engage in robo investing. The platform includes access to personal pension accounts, stocks and share ISA, Lifetime ISA, and Junior ISA, on top of a general investment account. You can choose a style that works for you and a portfolio will be managed on your behalf.

Fees are a little higher for accounts with smaller balances, but they are in range to be competitive with others.


The OG robo advisor, Betterment offers a straightforward and approach to robo investing in the U.S. Betterment offers different accounts for various goals, including an IRA account as well as a taxable investment account. The company also offers banking products, including high-yield savings and a checking product accessed by debit card.

Betterment fees can be a little steep once your account balance reaches $100,000. Additionally, there’s an additional fee for services related to speaking with an advisor.


This is another legacy robo investing provider. Wealthfront provides robust guidance for different goals, including saving for college and buying a first home. On top of that, Wealthfront is one of the only robo advisors in the U.S. that offers a 529 investment account option for tax-advantaged college savings in addition to an IRA.

Wealthfront has a higher minimum balance than similar U.S.-based robo advisors, though, requiring at least $500 to open an account, while many others have no minimum requirement.


In addition to providing a way to set up regular recurring investments, Acorns is a brokerage service that allows you to “round up” your transactions in connected accounts to invest with pocket change. Acorns offers a taxable account, as well as IRA and SEP IRA choices. It’s also possible to open a custodial account for your kids.

Acorns uses a flat monthly subscription model. As a result, the annual fee (as a percentage of invested capital) can appear high when you have a low balance.


Why is robo investing attractive for novice investors?

Because of its relative ease when it comes to getting started, robo investing can be attractive to new and inexperienced investors.

Outsource to low-cost professional investors

Many robo investing providers have advisory boards that include professional investors. Additionally, the strategies used are time-tested. As a result, it’s possible to make investing easy by outsourcing the heavy lifting to a low-cost professional service.

Time-efficient investing

Rather than spending hours researching different investment choices and building a portfolio, robo investing allows for spending less time. All you have to do is spend a few minutes setting up a profile that can be used to assess your risk tolerance.

After that’s done, it’s simply a matter of sending money to the investment account each month and having someone else take care of the details. In fact, after setting up the account and asset allocation, you don’t have to spend any time thinking about it afterward.

Automatic diversification

Most robo investing strategies use index ETFs which offer instant diversification. You get automatic portfolio diversity across sectors, asset classes, and geography without having to manage it on your own.

On top of that, if your diversification gets out of balance, many robo advisors automatically rebalance your portfolio to reflect your goals and risk tolerance.


What are the risks with robo advisors?

As with any investment, there are some risks with robo investing. Here are some items to be aware of.

Exposed to human error

Even though an algorithm handles most of the investing, the process still involves humans to a certain degree. The strategies and questionnaires set up are susceptible to human mistakes.

Investment losses

Any investment comes with the risk of loss. Even though robo advisors rely heavily on index products, they can still lose value, putting your capital at risk. Additionally, you aren’t likely to beat the market by a large margin, even if you don’t lose money. Because index products closely mirror different aspects of the market, you likely won’t beat the market, although tracking the market is likely to result in overall success in meeting your goals.


What is the criticism of robo investing?

Even though robo investing can be attractive, it’s also important to note that there are criticisms of robo investing as you make your decision about how to grow your wealth over time.

Little human interaction

If there is a market correction and you need reassurance, you might not get personal attention and context for the market. Additionally, you don’t have access to personalized investment advice and ideas.

They are index copiers … with an extra fee

Many robo advisors use index ETFs, so basically it’s copying aspects of the market. However, on top of the expense ratio, you will pay a management fee. You could potentially choose broad-based index ETFs on your own.

As long as you choose a brokerage that doesn’t charge transaction fees for buying ETFs, you might be able to see lower costs. However, you won’t have access to features like tax-loss harvesting or rebalancing if you invest on your own.

Fewer investment choices

Finally, with a robo advisor, you have access to fewer investment choices. Most robo investing providers only offer access to stock and bond ETFs, and occasional REITs.

You won’t be able to invest in individual equities and bonds, options, or cryptocurrencies. You also have less control over your portfolio allocation, outside of asking for tweaks to your asset allocation.


3 tips for successfully choosing a robo advisor

Consider your goals and portfolio strategy when choosing a robo advisor.  Don’t forget to take a few other steps, too.

Check under the bonnet

Even if the website looks great, check into the portfolios to see what’s available. Find out what index ETFs the provider uses. Then check the assets held in those ETFs. Also, check into the advisory board to see what credentials the team has to direct portfolio strategy.

Check the costs

Review the fee structure for the robo advisor. Depending on the services you use and the expense ratios involved, some providers can be as expensive as mutual funds. Make sure to run the numbers to ensure that you’re getting good value for what you’re paying.

Review the long-term performance

Check to see how the robo advisor handles market downturns. Because of the focus on index products, you’re not likely to see positive performance during a crash. However, you can see whether they offer a level of support during a downturn.


Robo investing: general terminology

  • Exchange-traded fund (ETF): A hybrid security that is similar to a mutual fund, but can trade on the exchange like a stock. Many robo advisors use ETFs to construct portfolios.
  • Expense ratio: This is the fee charged by a fund and expressed as a percentage of the value of your fund shares.
  • Management fee: This is the fee that’s charged to manage your robo investing accounts. This can be a percentage of your account value or a flat fee.
  • Modern portfolio theory (MPT): The Nobel-prize winning investment theory suggests the types of assets you have in your portfolio, and their allocation, is more important than the individual securities that you own. Many robo advisors use MPT as an underlying strategy for portfolio construction when using index ETFs.
  • Robo advisor: Investment management companies that rely heavily on algorithms to manage portfolios.



Robo investing can be a good choice for those who don’t want to worry about research. There’s no worry about losses due to day trading or news trading. Rather than managing a portfolio, someone else does the heavy lifting. With robo investing, it’s possible to set aside the same amount of money each week or month and have it automatically invested in a diversified portfolio that reflects your risk profile.


Robo investing FAQs

Can you lose money with robo advisors?

Absolutely, while robo-advisors manage your investments using a certain methodology, they can’t completely eliminate the inherent risk of the stock market. This means the value of your investments can fluctuate with market conditions, and it’s possible to lose money, particularly if you make withdrawals during a downturn.

How safe are robo advisors?

Robo-advisors like Vanguard or Schwab are generally safe. They offer diversified portfolio options for cash accounts, which are FDIC insured, reducing investment risk. However, as with any investing platform, market volatility can lead to losses.

What does a robo advisor do?

A robo-advisor offers automated financial advisory services. It assesses your financial situation through calculators and other planning tools and then allocates your funds across various account types and investment options, including Roth IRAs, ESG options, and more traditional retirement accounts.

What is the average return for a robo investor?

Average returns from robo-advisors like SoFi or Fidelity depend on market conditions, the specific portfolio chosen, and the robo-advisor’s investment strategy. Some robo-advisors offer “intelligent portfolios” aiming to outperform the market, but it’s important to check their rankings and reviews.

Are robo-advisors good for beginners?

Robo-advisors are generally excellent for beginners due to their low account minimums, simple interface, and user-friendly tools. They’re an easy way to start investing with perks like automatic portfolio rebalancing and access to Certified Financial Planners. Some, like Vanguard, even blend robo-advisory with human financial advisors for added guidance.

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