A robo-advisor is a service that offers automated investment advice and investment account management based on custom software and algorithms.
Robo advisors typically ask new account holders to fill out surveys to help establish their goals, risk tolerance, and retirement time frames—and help determine the right mix of asset classes to invest funds into. After using its own software to determine the proper asset allocation, the company will advise clients when and how much to contribute in order to reach their objectives, depending on the investment service.
Each of the major robo advisors follows slightly different methodologies and offers different features. Investing platform Acorns, for example, allows you to put away tiny amounts into investment portfolios using fractional shares.
Once the robo-advisor has created a diversified investment portfolio for you, it will typically employ an automated procedure on a regular basis to rebalance your portfolio to match your specified performance parameters. Some also offer automatic tax-loss harvesting, which can help investors save money and reduce their overall tax burden over time. Because it takes more time and each rebalancing results in transaction costs, rebalancing performed by human financial advisors is substantially more expensive, which is why robo advisors are a great compromise for people who want to maximize their yields and tax advantages, but minimize their costs.