Robo-advisors and online brokerage accounts are perfect examples of technology enabling everyday investors. A robo-advisor is a digital platform that can provide investment recommendations based on your goals and preferences, automating the portfolio management services you might otherwise receive from a (more expensive) human advisor. In contrast, a brokerage account will not offer you investment advice, but will place the tools you need to trade and invest right at your fingertips.
In other words, robo-advisors are great for those who want to invest in guidance and support, while brokerage accounts offer freedom and flexibility to investors who want more active control over their portfolios. If you’re considering opening an account with a robo-advisor or a brokerage, here’s a look at what both options offer and how they might fit into your financial life.
Key Takeaways
- Robo-advisors provide customized advice to help you optimize your investments, whereas self-directed brokerage accounts give you full control over your portfolio.
- People looking for low-cost professional advice or low-involvement investing success may benefit from the services of a robo-advisor.
- Investors who engage in complex strategies or want a more active role in managing their assets will likely prefer the flexibility offered by self-directed brokerage accounts.
Robo-Advisor vs. Brokerage Account: Key Differences
Robo-advisors stand out from standard brokerage accounts because of the additional portfolio management services they provide. When you use a robo-advisor to invest, you receive personalized recommendations from the firm’s proprietary algorithm to build a portfolio that’s optimized to help you reach your investment goals. An online brokerage account does not offer any such advice, and the investment decisions are entirely up to you.
Since robo-advisors offer the added benefit of helping you build and manage your portfolio, they generally come with higher fees than you would pay solely to access an online brokerage platform. For example, robo-advisor firms Wealthfront and Betterment will charge you an annual fee equal to 0.25% of your invested assets.
While it may be worth it to pay for the investment advice you receive from a robo-advisor, you can save on these fees if you’re willing to go it alone. Discount brokerage firms like Fidelity and TD Ameritrade charge no platform fees for their accounts and even offer zero-commission trading on stocks and exchange-traded funds (ETFs). However, even at these low-cost brokerages, you’ll face fees if you trade more complex instruments like futures and options.
While some firms specialize in robo-advisor offerings, many larger financial companies also offer automated advisory services as a supplement to their regular brokerage accounts. Examples of robo-advisor services from well-known discount brokerage firms include Charles Schwab’s Intelligent Portfolios and E*TRADE’s Core Portfolios.
What Is a Robo-Advisor?
A robo-advisor is a digital platform that handles the legwork of investing on your behalf. Robo-advisors typically start with an online questionnaire that gauges your investment preferences, time horizon, and risk tolerance.
Based on the answers you provide and the robo-advisor’s algorithms, it designs a personalized portfolio allocation and invests your money. The robo-advisor even takes care of managing the investment, rebalancing your portfolio to ensure that it maintains the optimal weightings of different assets to keep you on track toward your goals.
Robo-Advisor: Advantages and Disadvantages
Pros
Lower cost
Reasonable minimum deposit requirements
Hands-off investing
Cons
Lack of human touch
Inability to adjust to specific or new situations
Since they require little or no human input, robo-advisors can provide you with customizable investing advice at a lower cost than you would pay working with a human advisor. Robo-advisors also tend to have reasonable minimum deposit requirements, making it possible to get started even if you don’t have a lot of money ready to invest.
Having a robo-advisor automate your investing can remove a lot of the guesswork from the process, allowing you to take a hands-free approach. These qualities make robo-advisors ideal for beginners, people with less money to invest, and those who may not have the skills or the time to manage their own investments.
However, the same lack of human input that makes robo-advisors cost-effective also leads to some limitations. Of course, robo-advisors lack the human touch, and they may not be as effective as human advisors at understanding their clients’ overall financial situation, including tax planning and estate planning issues. Also, since their algorithms are based on data from the past, robo-advisors may not be well-suited to respond to new or unexpected market developments.
There are some additional questions about how effective robo-advisors might be at fulfilling fiduciary duties—the responsibility of investment advisors to act in the best interest of their client. It remains unclear how robo-advisor algorithms handle potential conflicts of interest between their firms and investors’ portfolios.
Examples of Robo-Advisors
If you’re shopping for the best robo-advisors, you have no shortage of options. Along with Betterment and Wealthfront, both pioneers in the area of offering robo-advisor services, there is M1 Finance. They all offer automated investing services with low minimum deposits ranging from $0 to $500. Other firms like Empower have higher minimums of around $100,000.
In addition to companies that focus primarily on robo-advisory products, other financial firms have stepped into the game with their own automated portfolio management platforms. For instance, Fidelity Investments offers Fidelity Go, while Merrill Lynch has its Merrill Guided Investing program.
What Is a Brokerage Account?
A brokerage account allows you to invest in financial assets like stocks, bonds, mutual funds, and ETFs. You open your account at a licensed financial institution, which trades and holds these securities on your behalf. The assets in the account are yours, and if you’re not investing in a tax-advantaged account, then you’ll have to pay taxes on any profits.
Various types of brokerage accounts are available to meet the needs of different investors. If you’re looking for personal advice and investment management, you might consider a full-service brokerage that offers a wide array of services, but this will involve higher costs. People in search of lower fees who are willing and able to research and manage their own investments typically turn to online brokerages.
Brokerage Account: Advantages and Disadvantages
Pros
Flexibility
Low cost
May offer commission-free trading
Can trade in individual stocks and bonds and incorporate more complex strategies
Cons
You take the responsibility of choosing individual stocks, bonds, ETFs, etc.
Requires a more hands-on approach to investing
For the purposes of this article, we’ll focus on the pros and cons of self-directed online brokerage accounts. The big advantage of these platforms is that they allow you lots of flexibility in managing your investments while keeping your costs low. Many online brokerages have begun to offer commission-free trading of stocks, bonds, and ETFs. Some of these accounts may also allow you to trade on margin or use futures- and options-investing strategies.
Along with this great investing freedom comes great responsibility. The main downside is that these brokerage accounts leave the investment decisions up to you, requiring you to do your own research and portfolio management. If you don’t have much experience or adequate time to monitor your investments, then you may not be as successful as you would with a virtual or human advisor. Luckily, the best online brokerage platforms have built-in research and educational tools to help you along the way.
Examples of Brokerage Accounts
It’s possible to open a brokerage account with many different types of financial firms. Even the centuries-old financial giants like JPMorgan and Wells Fargo have begun to offer their own versions of self-directed online accounts alongside their more traditional investment advisory services. Firms like Charles Schwab and Fidelity built their reputations as discount brokerages and have excelled in the self-directed online space, while others like E*TRADE and Interactive Brokers have always focused on using technology to enhance the investing experience.
Robo-Advisor vs. Brokerage Account: Which Is Best for Me?
If you are deciding between a robo-advisor and a self-directed brokerage account, the main thing you want to consider is how much investment advice and guidance you hope to receive. If you’re more comfortable leaving decisions to the (virtual) experts and your ideal approach to your portfolio is to set it and forget it, then a robo-advisor may be a great fit. If you’re more interested in taking matters into your own hands—and having a whole world of investment possibilities just a few clicks or taps away—then a self-directed brokerage account may be more your speed.
What Is the Main Disadvantage of Using a Robo-Advisor?
Although a robo-advisor aims to personalize your portfolio based on your goals, it’s incapable of achieving a holistic perspective on your finances. Robo-advisors typically offer a limited set of investments, excluding things like derivatives, and they don’t allow margin trading or other sophisticated strategies. Since they base decisions on data from the past, robo-advisors may be ineffective at reacting to unexpected events.
Should I Invest by Myself or Use a Robo-Advisor?
Determining whether you should invest in a self-directed account or use a robo-advisor comes down to your own preferences. Investing on your own involves taking on a lot of responsibility. On one hand, if you have the time, tools, and guts, then managing your own portfolio can be rewarding in terms of experience as well as profits. On the other hand, there is nothing wrong with seeking advice, and robo-advisors let you delegate some of the burdens of investing to the algorithm.
How Risky Are Robo-Advisors?
Any type of investment involves taking on risk, and robo-advisors are no different. The performance of your account is inevitably subject to the whims of the market, and there is no guarantee that the portfolio built and maintained by your robo-advisor will achieve the optimal results. However, the same is true of human advisors, and there is no reason to believe that robo-advisors are inherently riskier than any other type of financial advisory service.
The Bottom Line
Robo-advisors provide personalized recommendations to help you build your portfolio, while self-directed brokerage accounts leave your investment decisions up to you. A robo-advisor gives you investing management services without the steeper cost of a full-service advisor, but it doesn’t give you the flexibility to pursue unique or complex strategies. A self-directed account gives you the autonomy and the responsibility of managing your portfolio.
