Robo-Advisor Explained: How It Works, Costs, and Key Pros & Cons

What Is a Robo-Advisor?

A robo-advisor is an automated investment service that uses algorithms and models—often developed by financial experts—to create and manage your portfolio with minimal human intervention.

When you sign up, a robo-advisor assesses your risk tolerance, investment timeline, and financial goals. Based on your answers, it builds a portfolio tailored to your goals and risk tolerance, then automatically manages and adjusts it as markets change.

✅ Compared to working with a human financial advisor, robo-advisors could be more affordable, easier to use, and accessible to a wider range of investors.

❌ One potential drawback is that you don’t have full control over individual stock selections. Robo-advisors typically follow modern portfolio theory, which prioritizes diversification to match overall market trends. If your strategy is to pick specific stocks and aim to outperform the market, a robo-advisor may not be the right fit.

​​How Does a Robo-Advisor Work?

Just like a human financial advisor, a robo-advisor starts by asking you a few questions about your current situation, financial goals, and risk appetite:

✅ How much money do you make?

✅ How much do you have in savings?

✅ How much are you willing to invest?

✅ What are you saving for?

✅ What’s your risk tolerance?

Based on your responses, the robo-advisor builds an investment portfolio to meet your goals and adjusts it as the market changes.

What Do Robo-Advisors Invest In?

Most robo-advisors invest your funds in a diverse portfolio of mutual funds and ETFs, like the S&P 500 or the US bond market. They typically follow a passive investment strategy, aiming to match market performance rather than beat it.

How Does Portfolio Rebalancing Work?

Rebalancing involves adjusting your portfolio when certain asset classes outperform others. It typically means buying and selling of assets to maintain your target mix of assets.

✏️ Example: Let’s say that based on your risk profile and goals, your robo-advisor builds you this portfolio:

If growth stocks perform well, the balance may shift, with a higher percentage of your portfolio in growth stocks. To correct this, your robo-advisor sells some growth stocks and redistributes the funds into blue-chip stocks and bonds to maintain your target allocation.

How Does a Robo-Advisor Use Tax-Loss Harvesting?

Tax-loss harvesting is a strategy that could help reduce taxable gains by selling investments at a loss and replacing them with similar assets.

When you sell stocks at a profit, you may owe capital gains taxes. This is where tax-loss harvesting comes in. To offset this, a robo-advisor can sell underperforming assets at a loss, which could help lower your taxable gains, depending on your tax situation and applicable laws.

✏️ Example: If your S&P 500 ETF dips in value, the robo-advisor may sell it at a loss and immediately buy a different S&P 500 ETF. This way, you still hold a comparable investment while capturing the tax benefit. If the market rebounds, your new ETF could still gain value. 

✅ Why does this matter?

Rebalancing and tax-loss harvesting are time-consuming tasks. Many human advisors only rebalance portfolios once or twice a year, and individual investors may find it too complicated to manage. However, a robo-advisor can do it everyday and find opportunities that may be easy to miss.

How Much Does a Robo-Advisor Cost?

Robo-advisors typically charge 0.2% to 0.5% annual fees and may have low or no minimum investment, making them significantly more affordable than traditional financial advisors.

Some human advisors can charge an AUM fee of around 1% to 2%. Many might also require a minimum investment of at least $100,000 in your balance. 

Here are the robo-advisor fees of some popular platforms:

📌 Carry’s Robo-advisor offers a simple way to start investing. Open an account in under 10 minutes → 

Advantages of Using A Robo-Advisor

Easy to Get Started

Robo-advisors offer a simple, accessible entry point into investing. With low or no minimum investment requirements, they’re ideal for beginners or those with limited capital. Most platforms are user-friendly, making it easy to open an account, set investment goals, and monitor portfolio performance.

Additionally, many robo-advisors also come with a library of training and educational resources to help users build financial literacy as they invest.

Available 24/7

With a human advisor, your contact is limited to their hours of operation. To execute a trade, you’d normally have to call or meet them and wait for them to execute your desired trades. 

Robo-advisors operate entirely online and are accessible 24/7. This means you can deposit or withdraw funds, check balances, and make portfolio adjustments—all at your convenience, without needing to schedule a meeting or phone call.

Lower Fees

As mentioned earlier, robo-advisors are considerably cheaper than a traditional human advisor or wealth manager. Through automation, robo-advisors can build and manage your portfolio at a fraction of the cost of human advisors.

Lower Capital Required

Robo-advisors generally require a lower account balance to get started than if you were to invest with a human advisor. A human advisor may have a required minimum balance ranging between $25,000 to $1 million depending on the advisor. A robo-advisor typically only requires between $1 to $3,000, with many having $0 account minimums.

📝 Disclaimer: Diversifying your investments can help manage risk by spreading it across different assets. But it doesn’t guarantee profits or protect against losses during broader market downturns. It’s still possible to lose money, even with a well-diversified portfolio.

Makes It Easy to Build a Diverse Portfolio

Robo-advisors emphasize portfolio diversification. They allocate investments across different asset classes and often use low-cost index funds or ETFs. This diversification aims to reduce risk by spreading investments across multiple securities, sectors, and geographic regions.

Disclaimer: Diversification helps manage risk, but it cannot guarantee gains or fully protect against market losses.

Removes the Risk of Emotional Investing

By following preset algorithms and rules-based models, robo-advisors help you avoid emotionally driven decisions—such as panic selling during market downturns. This creates a disciplined, long-term approach to investing.

Automated Rebalancing and Tax-Loss Harvesting

Most robo-advisors offer:

📝 Note: Not all robo-advisors offer tax-loss harvesting, and its effectiveness can vary based on individual tax situations and applicable tax laws.

Ability to Invest Through a Variety of Accounts

Most robo-advisors let you choose what account you want to invest from. You can use a robo-advisor to invest through individual investing accounts, savings accounts, and even retirement accounts.

When signing up, you can choose the account type that aligns with your goals—whether you’re saving for retirement, building wealth, or investing short-term.

📌 With Carry, you can use our robo-advisor with a Traditional or Roth IRA and a Solo 401k.

Disadvantages of Using a Robo-Advisor

Lack of Human Interaction

Robo-advisors are built to automate investing, but they lack the personal touch that many investors find valuable. Human financial advisors can:

As an Add-On you can get 24/7 access to your very own financial planner, who will start by assessing your financial situation and goals and building you a custom financial plan. Consult them about investing through Carry’s robo-advisor, what your risk preferences should be, and what accounts you should be prioritizing. Whenever you need help or if you’re unsure about anything, you can contact them and ask them questions at any time.

📌 Start your account 

Inability to Handle Complex Situations

Robo-advisors are typically best for straightforward investment needs. They may not be equipped to manage:

Human advisors are more adept at addressing complex financial landscapes. They bring expertise, real-time analysis, and nuanced insight—something automated tools can’t yet fully replicate.

Algorithm Limitations

While robo-advisors rely on sophisticated algorithms, their effectiveness depends on:

❌ Potential drawbacks:

Limited Investment Options

Some robo-advisors may only offer a selection of pre-built portfolios or use passive investment strategies such as index funds or ETFs. This limited range of investment options may not cater to investors seeking more specialized or alternative investment opportunities.

📝 Note: Depending on your provider, some robo-advisors have expanded their offerings to include actively managed portfolios.

Who Should Use a Robo-Advisor?

Robo-advisors are best suited for investors who want a streamlined, cost-effective way to invest, especially if their financial needs are relatively straightforward.

✅ New investors: If you’re not comfortable making your own investment decisions, a robo-advisor can help you build an optimal portfolio with lower risk based on your financial goals.

✅ Hands-off investors: If you’re an experienced investor, but don’t want to spend time researching and managing your own investments, a robo-advisor can put your investing on autopilot.

✅ Tax-conscious investors: Many robo-advisors offer automated tax-loss harvesting, saving time and potentially reducing your tax burden without needing to hire a tax advisor.

✅ Fee-sensitive investors: If you’re looking for a low-cost alternative to traditional wealth management and don’t require in-depth estate or tax strategies, a robo-advisor may be a more affordable solution.

---

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form [ADV Part 2A] (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=916200) brochure and [Form CRS] (https://reports.adviserinfo.sec.gov/crs/crs_323620.pdf) or through the SEC’s website at [www.adviserinfo.sec.gov] (http://www.adviserinfo.sec.gov/).