Investing for Retirement Through Robo-Advisors

Pros and Cons of Using a Robo-Advisor for Your Retirement Investment

A woman uses her smartphone to access her investment robo-advisor.

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For some people, choosing investments seems like a hard task. The good news is that the growth of exchange-traded funds (ETFs) have given people access to expert investment management. Retirement plans with financial advisors and professional account managers have added to the lineup of options that can help you invest.

Now, robo-advisors are poised to shake up the investing landscape, but there are some vital things to be aware of before you add them to your retirement planning.

The term robo-advisors refers to automated platforms that use algorithms to match you with investments based on your comfort with risk and your time frame. These platforms are also called "automated investment advisors" or "digital advice platforms."

Robo-advisors were first launched in 2008 and have been offered to people on a much broader scale since 2010. Most of them use ETFs as their main investment type. The portfolios often include a mix of asset classes such as stocks and bonds. Other asset classes, such as real estate and commodities, are also used by many of these platforms.

As is the case with any new investment, there is often a debate about the pros and cons of adding this type of platform into a sound plan.

Here are some of the pros and cons of using an online platform to invest.


Despite the fact that robo-advisors only manage a small portion of all of the retirement assets in the U.S., they are growing fast and will be a vital part of planning for years to come. 


A Simple Approach That Offers Easy Access

The ease of online access is a core feature of online platforms. Many people like the fact that they can set up and fund an account easily using a computer or phone.

To get started, you'll answer a few simple questions. Your answers will be used to assess how much risk you are willing to take and what your investing goals are. Then, you'll get money allocation suggestions and an option to revise your answers to assume more or less risk. You usually have 24/7 access to your account, and updates about how your plan is doing are given to you on demand.

Robo-advisors are known for the low amount of money it takes to get started. Some do not have account balance minimums. This helps to lower the entry point for people who want to use them to invest. In contrast, registered investment advisors (RIAs) require more money to get started, which could be $100,000 or more.

Capable Investing 

The process of building a diverse portfolio is an easy task for robo-advisors. The account setup process often takes minutes. People who have a good grasp on where they want their money to go often prefer the ease of making their own trades. Many financial advisors are adding the use of auto-investing to improve the value of their services.

Instant Diversification 

One of the most vital rewards of using a robo-advisor is the option to invest in an array of products. This approach is based on modern portfolio theory research. It puts the focus on your complete allocation to major asset classes such as stocks, bonds, and real estate. 

Access to Low-Cost Investments 

Robo-investors provide a cheaper choice to asset management firms. Without the added expense of brick and mortar branches and with fewer humans to pay, they can often perform almost the same service for a lower cost. The normal fees could range between 0% and 0.5% of total assets under management (AUM). Since a normal AUM fee of 1% to 2% could be charged by financial advisors, the lower fees could result in big savings when added up over time.

Tax-Loss Harvesting 

Many of these platforms offer tax-loss harvesting for taxable accounts. This is a process of offsetting capital gains through the sale of another asset to create a loss. This process is used to enhance after-tax returns, but tax-loss harvesting doesn’t help all investors. For instance, people in the 10% to 12% tax bracket are taxed at the 0% rate for capital gains.

Unbiased Advice

Human money experts are subject to the same biases that can derail the plans of investors. In contrast, robo-advisors can remove the potential for firms to push their own products or let biases affect their advice. 


Robo-advisors are set up to assume that their clients have a well-defined set of financial life goals, but that's not always the case. That's when it is vital to talk to an expert.


Most Robo-Advisors Lack the Personal Touch 

While some hybrid advisors offer a robo-advisor with human help when needed, most automated platforms do not provide access to certified financial planners. If that matters to you, find out whether the platform you're thinking about using offers access to a human advisor through phone, email, online, or video chats.

Advice Is Only One Part of a Financial Plan 

Getting ready to retire is the most common financial goal and the main reason people set money aside in the first place. Still, if you have other goals such as saving for your child’s college education, paying off debt, or buying a beach cottage, your goals should dictate how you invest your money. So far, there aren’t any robo-advisors that can assess whether it makes sense to save for urgent needs, pay down debt, or invest for long-term goals.

Automation Does Not Cancel Out Bad Money Choices 

Online platforms may help people create investment plans, but they cannot replace personal planning advice. Behavioral finance experts like to point out that the human brain makes it hard for us to make rational money choices all of the time. While financial planning is made simple through digital platforms, they don't get rid of the prospect that you will make an emotional decision with your money.

Many Platforms Lack Intuitive Risk Assessments

The process of finding how much risk you can bear is based on scientific principles and research. For some people, the types of questions asked need at least a basic level of financial insight to relate the questions to real-life scenarios. Most platforms use a brief online survey to assess risk tolerance and goals. 

Still, there are many risks that come with the investment process, and no single tool exists that can claim 100% accuracy in assessing risk. As such, many planners and investment pros would agree that a deeper look is needed to fully capture your risk tolerance as you invest your money.

They May Not Give Advice on Earning Income Through Drawdown

The main purpose of saving for the future is to be able to use those funds when you are no longer working. While robo-advisors are most popular among millennials and Generation X, there is a growing interest among baby boomers as well. Still, as older people start to take money from their accounts when they retire, it is vital to use a drawdown strategy that is both tax-smart and focused on getting the most income. People who are ready to retire should be mindful when choosing a robo-advisor, because some online advice firms provide this type of help, while others do not.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Jill E. Fisch, Marion Labouré, and John A. Turner. "The Emergence of the Robo-Advisor," Pages 16-17. The Disruptive Impact of FinTech on Retirement Systems. Accessed Nov. 18, 2021.

  2. Jill E. Fisch, Marion Labouré, and John A. Turner. "The Emergence of the Robo-Advisor," Page 19. The Disruptive Impact of FinTech on Retirement Systems. Accessed Nov. 18, 2021.

  3. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 67.

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