Morgan Stanley
  • Wealth Management
  • Sep 29, 2022

What Is a Robo-Advisor?

A robo-advisor typically offers a managed portfolio with lower investment minimums based on your specific goals. Here's a primer.

You may have heard about the popularity of online managed investing platforms, or robo-advisors, designed to help individuals with their financial goals. If you’re considering these platforms, it’s important to understand both how they work and whether they fit your needs.

How Do Robo-Advisors Work?

Most robo-advisors are online-only, meaning they don’t involve working with a dedicated investment professional to manage your money. In this context, "robo" refers to a financial product that employs algorithms to build and maintain a detailed investment plan. However, some robo-advisors are “hybrid,” offering some amount of access to humans who can answer questions and provide some level of service.

Most robo-advisors are accessible via the provider’s website and will start by asking a series of questions to learn more about you and your financial goals, such as saving for a house, investing for retirement or simply building wealth. They then take your responses and apply algorithms to suggest a portfolio, which usually consists of a mix of mutual funds and exchange-traded funds (ETFs), or only ETFs. If you’re comfortable with the suggested portfolio and choose to start investing, you’ll fund your account through electronic transfer, mobile check deposit, wire transfer or some other means.

Note that you can expect to pay for the investment plan and its management. Most robo-advisors charge investors a fixed management fee that is usually calculated as a percentage of your current account balance. This advisory fee does not include, and is in addition to, any fees you pay to the companies providing the mutual funds and ETFs. Generally, robo-advisory fees tend to be lower than fees paid for other types of managed products or working with a dedicated investment professional. 

What Are the Benefits of Investing With a Robo-Advisor?

  • Ease: Choosing and monitoring investments on your own can be complicated and time-consuming, and seeking financial advice from a professional usually requires a relatively high minimum portfolio balance. Robo-advisors, on the other hand, can provide an easy, cost-efficient introduction to investing toward your goals, with algorithms taking the guesswork out of selecting individual securities, and usually have lower minimum balance requirements, making the markets more accessible. As your asset mix, investment objectives and financial needs grow more complicated, you may transition to working with a dedicated investment professional, but a robo-advisor can be a great first step.

  • Active/passive investment options: Some robo-advisors can give you access to both active and passive investment strategies. Active investing involves using human portfolio managers to harness research and their own experience to pick and choose investments, with the goal of "beating the market," or outperforming certain market benchmarks. If you’re a passive investor, your goal is to match the performance of certain market indexes, such as the S&P 500, through market-tracking portfolios.

  • Rebalancing done for you: After you open your account, your robo-advisor will build a portfolio made up of a mix of investments, the balance of which may "drift" over time due to contributions, withdrawals and market conditions. A robo-advisor can automatically rebalance your investments to help your portfolio stick to its target asset allocation.

  • Tax-loss harvesting: Taxes can take a bite out of your investment returns. Some robo-advisors can monitor your account to find potential for tax-loss harvesting opportunities and make those moves automatically.

  • Thematic investing: You may want to invest in what matters to you. Some robo-advisors offer more personal choice, letting you allocate some of your money toward specialized themes like climate action, robotics or gender diversity. This type of focus is often referred to as an investment or portfolio "tilt." 

Should I Invest With a Robo-Advisor?

Robo-advisors can be a good option for investors who:

  • are just starting out,
  • don’t have a lot of money to invest,
  • don’t have the time or desire to manage their own finances, or
  • like the idea of managing their money online.

Carefully consider your situation, preferences and goals before you choose any investment strategy or platform.

Alternatives to Investing with a Robo-Advisor

If you are just getting started with investing, you may also consider a self-directed brokerage account, which allows you to pick which securities to invest in and make any subsequent buying or selling decisions.

If you have substantial assets or complicated finances, or you are saving for a number of different financial goals, you may want to work with a dedicated investment professional instead of a robo-advisor. 

Taking the Next Step

E*TRADE’s Core Portfolios is our answer to a robo-advisor. To get started, answer a few simple questions about your goals, risk tolerance and other investing preferences, and our automated process does the rest.1 We will provide you with an investment proposal to help you achieve your objectives, whether that’s preparing for retirement, saving for education expenses or growing your wealth. We then monitor and manage your investments going forward, taking care to automatically realign them with your risk preferences.2 You can also customize your managed account with socially responsible investments3 or smart beta strategies.4

As you work toward your goals, you can see how your investments are performing, track your progress and make adjustments—all online. We encourage you to learn more and decide if automated investment management may be right for you.

Footnotes

1Prior to investing in a managed portfolio, E*TRADE Capital Management will obtain important information about your financial situation and risk tolerances and provide you with a detailed investment proposal, investment advisory agreement, and wrap fee programs brochure. These documents contain important information that should be read carefully before enrolling in a managed account program. Please read the E*TRADE Wrap Fee Programs Brochure for more information on the advisory fee, rebalancing methodologies, portfolio management, affiliations, and services offered.  For Core Portfolios clients, interaction with E*TRADE Capital Management will generally be limited to the web-based interface. A Core Portfolios client does not have an individual Financial Consultant or portfolio manager assigned to the account. E*TRADE Capital Management, through its Investment Policy Committee and with support of Investment Strategists, selects, removes, and adds portfolio holdings and determines the program's rebalancing methodology. Clients will be able to consult with a team of specialists by calling 866-484-3658.

Core Portfolios does not provide advice regarding whether or not to open a managed account. The Core Portfolios advisory program recommends portfolios based on answers to your Investor Profile Questionnaire. E*TRADE Capital Management utilizes an algorithm to determine your recommended portfolio. Not all answers are weighted equally and answers related to time horizon and risk are weighted the most when scoring the Investor Profile Questionnaire. The recommendation is not a complete financial plan and the algorithm does not consider outside assets, concentration of holdings in other accounts, and multiple investment goals. Taxable accounts with fixed income allocations invest in municipal bond ETFs while tax-advantaged accounts, such as IRAs, invest in corporate bond ETFs.

2Core Portfolios utilizes a semiannual rebalancing methodology. Also, portfolios will be rebalanced when material deposits or withdrawals are made. A rebalancing strategy seeks to minimize relative risk by aligning the portfolio to a target asset allocation as the portfolio’s asset allocation changes. Rebalancing a portfolio may limit the upside growth potential of the portfolio and these types of strategies might rebalance the client accounts without regard to market conditions. Furthermore, rebalancing strategies may not address prolonged changes in market conditions. Out of tolerance parameters and/or rebalancing methodologies are subject to change.

3This strategy includes ETFs that focus on companies known for incorporating socially responsible investing criteria, sometimes referred to as "environmental, social, and governance ("ESG") investing; screening for companies that adhere to ESG standards; or fixed income ETFs focused on community impact securities. This strategy may limit or eliminate exposure to investments in certain industries or companies that do not meet specific ESG criteria. As a result, the ETF may underperform or outperform other funds or an appropriate benchmark that does not have an SRI or ESG focus and may forgo certain market opportunities available to strategies that do not use these criteria.

4Smart Beta strategies seek to outperform a benchmark index and typically aim to enhance returns or minimize risk relative to a traditional market-capitalization-weighted benchmark. An ETF employing a smart beta strategy may have higher portfolio turnover which may indicate higher transactions costs relative to its benchmark. Utilizing smart beta strategies does not guarantee against underperformance relative to a more traditional market-capitalization-weighted benchmark. ​

Important Disclosures

The material provided by E*TRADE Securities LLC, E*TRADE Capital Management, LLC, Morgan Stanley or any of their direct or indirect subsidiaries, or by a third party not affiliated with E*TRADE is for educational purposes only and is not an individualized recommendation.  This information neither is, nor should be construed as an offer or a solicitation of an offer, or a recommendation to buy, sell, or hold any security, financial product, or instrument discussed herein, or to open a particular account or to engage in any specific investment strategy.

Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.

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Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Asset allocation, diversification and rebalancing do not assure a profit or protect against loss. There may be a potential tax implication with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy.

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Core Portfolios are offered by E*TRADE Capital Management, LLC ("ETCM"), a Registered Investment Adviser and affiliate of Morgan Stanley.  Because of its affiliation with ETCM, Morgan Stanley benefits if you choose to establish a relationship with ETCM. Morgan Stanley is not making a recommendation as to whether or not you should engage ETCM, nor as to the quality or cost of their services.

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Please read the E*TRADE Wrap Fee Programs Brochure for more information on the advisory fee, rebalancing methodologies, portfolio management, affiliations, and services offered. Diversification and asset allocation strategies do not ensure profit or protect against loss. Investments in securities and other instruments involve risk and will not always be profitable.​

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Investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund and exchange-traded fund (ETF) before investing. The prospectus contains this and other information about the mutual fund and ETF. To obtain a prospectus, contact your Financial Advisor or visit the mutual fund and ETF company’s website. Please read the prospectus carefully before investing.

Securities products and services offered by E*TRADE Securities LLC, Member SIPC. Investment advisory services offered by E*TRADE Capital Management, LLC, a Registered Investment Adviser. E*TRADE Securities LLC and E*TRADE Capital Management, LLC, are separate but affiliated subsidiaries of Morgan Stanley.

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