Automated investing platforms use software to build and manage portfolios based on factors such as your goals and risk tolerance. Instead of selecting and rebalancing every investment yourself, you allow an algorithm to handle much of the ongoing portfolio management.
These services can make long-term investing more convenient, but fees, investment choices, tax features, minimum balances, and access to human advice vary considerably.
Understand the Complete Cost
Many automated investing services charge an annual advisory fee based on the amount of money being managed.
That isn't necessarily your only expense. If your portfolio contains ETFs or other funds, those investments may have their own expense ratios. These costs are generally deducted at the fund level.
Before opening an account, look beyond the headline advisory fee and compare:
- Annual management fees
- Fund expense ratios
- Account minimums
- Trading or transfer costs
- Fees for specialized services
Even relatively small recurring expenses can affect long-term investment returns.
Check the Minimum Investment
Account minimums vary widely. Some automated platforms allow you to begin with a small amount, while others require several hundred dollars or more.
A higher minimum isn't automatically a disadvantage if the service provides features you value. However, it can make a platform less practical if you're just starting to invest.
Also review eligibility requirements, particularly if a service limits accounts based on age, residency, or other regulatory requirements.
Understand Automated Portfolio Management
Most robo-advisors begin by asking questions about your financial goals, investment timeline, and comfort with market fluctuations.
The software then recommends a portfolio, commonly built from diversified, relatively low-cost funds. Some platforms let you customize individual holdings or asset allocations, while others give you much less control.
Automated rebalancing is another common feature. When market movements cause your portfolio to drift away from its target allocation, the system can buy or sell investments to move it closer to the intended mix.
Automation can simplify portfolio maintenance, but it doesn't prevent investment losses.
Look Closely at Tax-Loss Harvesting
Some automated platforms offer tax-loss harvesting for taxable investment accounts.
The strategy generally involves selling an investment at a loss and replacing it with another investment intended to maintain similar market exposure. The realized loss may potentially offset certain taxable investment gains, subject to applicable tax rules.
Tax-loss harvesting isn't equally useful for everyone. Its potential value depends on your portfolio, tax situation, gains and losses, and applicable tax rules.
It also generally isn't relevant in the same way inside tax-advantaged retirement accounts.
Compare the Available Investments
Not every automated investing service offers the same investment menu.
Depending on the platform, portfolios may contain domestic and international stocks, bonds, commodities, sector funds, or socially focused investments. Some services also provide individual stocks or specialized investment strategies.
More choices aren't necessarily better. Consider whether the available investments support your strategy without adding unnecessary complexity.
Review the Account Types
Your investment goals may require more than a standard taxable brokerage account.
Automated platforms can potentially support individual and joint accounts, retirement accounts, trusts, education savings accounts, and cash-management products. Some also provide automated bond portfolios or other specialized services.
Check whether the platform supports the accounts you actually need rather than choosing based solely on the number of features advertised.
Know How Cash Management Differs From Investing
Some investing platforms offer cash-management accounts alongside investment portfolios.
These accounts can provide interest and may use partner financial institutions to provide deposit insurance. However, the structure can differ from opening a traditional savings account directly with a bank.
If you're considering one, verify the current interest rate, how deposits are held, applicable insurance arrangements, withdrawal rules, and whether any promotional rate has eligibility requirements or an expiration date.
Rates can change, so don't choose a long-term investing platform based solely on a temporary cash yield.
Be Careful When Borrowing Against Investments
Some investment platforms allow eligible customers to borrow against the value of their taxable portfolios.
This type of borrowing can involve margin. If your investments decline sufficiently, you could be required to add funds or have securities sold to satisfy account requirements.
Easy access to borrowing doesn't eliminate the underlying financial risk.
Decide Whether Human Advice Matters
One of the biggest differences among automated investing platforms is access to financial professionals.
Some services are almost entirely software-based. Others offer access to human advisors through premium plans or separate services.
A fully automated approach may work well if you primarily want portfolio construction and rebalancing. More complicated decisions involving retirement, taxes, inheritance, divorce, or other major financial changes may create a greater need for individualized professional guidance.
Understand Investment Protection
Brokerage protections shouldn't be confused with protection against investment losses.
Certain protections may apply if a brokerage firm fails and customer assets are missing, subject to applicable rules and limits. They don't reimburse you simply because stocks, bonds, or funds decline in value.
Every investment portfolio carries some degree of market risk.
Choose Automation Around Your Needs
An automated investing platform can be useful if you want diversified portfolio management without making every investment decision yourself.
Before choosing one, compare its advisory fee, underlying investment expenses, account minimum, portfolio flexibility, tax features, available accounts, withdrawal rules, and access to professional guidance.
Most importantly, don't select a platform because of a single promotional rate or advanced feature. Consider whether its overall approach fits your investment horizon, financial goals, risk tolerance, and preference for hands-on or automated management.
