(NewsNation) — Robo-advisors are an automated, low-effort way to invest, but there are several things to know before turning your hard-earned money over to an algorithm.

They sound like something from the distant future, but robo-advisors are already here and have been growing in popularity for over a decade.

In 2024, robo-advisors were expected to be managing $1.2 trillion in assets, up from $47 billion in 2015, according to Charles Schwab.

It’s a sign more people have become comfortable letting algorithms determine their investment strategy.

Robo-advisors, which are automated investing platforms, offer several advantages. They take the emotion out of investing and tend to be more cost-effective than using a traditional financial adviser.

On the other hand, they’re also less personalized and may not be the best option if you have complex financial needs.

Here’s what to know about robo-advisors when it comes to your finances.

What is a robo-advisor?

A robo-advisor is a digital service that uses algorithms to manage your investments based on your financial goals.

As the name suggests, there’s little to no human oversight. When you sign up, you’ll answer questions about your age, risk tolerance and time horizon so the robo-advisor can assess your financial goals. The technology then uses that data to offer investment advice.

With a robo-advisor, your money gets invested and rebalanced automatically, allowing you to take a more hands-off approach when it comes to managing your portfolio.

Some robo-advisors also offer guidance on retirement planning and getting out of debt, but that advice is less personalized than it would be from a human adviser.

What are the benefits of a robo-advisor?

The main benefit of a robo-advisor is the low cost. They tend to charge significantly lower fees than traditional financial advisers because everything is automated.

Like other financial advisors, robo-advisor fees are usually based on the amount of money you have invested in the account.

Different platforms have different fees, but you’ll typically pay an annual management fee between 0.25% and 0.50% for a robo-advisor — less than the average 1% charged by a human adviser, according to Vanguard.

In other words: For every $10,000 invested, your robo-advisor fee would be between $25 and $50 per year.

Another benefit is that you typically won’t be charged transaction fees with a robo-advisor, whereas in a standard brokerage account, you’re often charged to buy or sell investments.

Other advantages of a robo-advisor:

• It’s hassle-free and relatively easy to set up
• Algorithms are unemotional, which means decisions are more disciplined and rooted in data
• Doesn’t require constant monitoring — robo-advisors automatically adjust your portfolio based on market conditions
• You don’t have to deal with advisers, some of whom function more as salespeople trying to lock in commissions

Some are hopeful that robo-advisors could potentially level the playing field between wealthy and vulnerable households when it comes to personal finance.

“Robo-advisors can offer financial advice at substantially lower fees than humans, which allows them to cater their services to individuals of all socioeconomic statuses, including vulnerable groups,” two researchers wrote in a Brookings Institution report.

How well do robo-advisors perform?

Five-year returns from most robo-advisors range from 2% to 5% per year, according to Vanguard. However, performance varies based on asset allocation and market conditions.

But just like human advisers, robo-advisors can’t guarantee a return. They’re vulnerable to fluctuations in the market even with a well-diversified portfolio.

Robo-advisors often invest heavily in low-cost exchange-traded funds (ETFs) that track the broader stock market. It’s a strategy that offers investors exposure to a wide range of companies and tends to be less volatile than choosing individual stocks.

Many robo-advisors offer an additional service known as tax-loss harvesting — lowering your tax bill by offsetting capital gains with capital losses through selling stocks at the right time.

Are robo-advisors regulated?

Robo-advisors must register with the U.S. Securities and Exchange Commission (SEC) and follow the same laws and regulations that a traditional human broker would. Most robo-advisors are also members of the Financial Industry Regulatory Authority (FINRA).

You can check the SEC’s Investment Adviser Public Disclosure database or FINRA’s BrokerCheck to make sure a robo-advisor is legit.

If turning over your hard-earned money to a robot algorithm feels sketchy, you’re not alone.

Given the option, 84% of U.S. adults would rather work with a human financial adviser compared with 16% who would prefer to use a robo-advisor, according to a 2020 NerdWallet survey.

A more recent 2023 YouGov survey suggests Americans may be warming up to the idea. Among those who have used a robo-advisor or are interested in using one, roughly half (49%) said they are more likely to trust a robo-advisor compared to a traditional financial adviser.

What are the downsides of a robo-advisor?

Robo-advisors offer general financial planning services, but they don’t create custom financial plans. If you need specific, personalized advice, then a traditional financial adviser may be a better option.

A good financial adviser will help you plan for the future and accomplish your goals, taking a more holistic view of your situation than a computer algorithm.

Using a robo-advisor also gives you less control over your investments. If you’re someone who prefers to choose where your money goes, then automating that process may not be for you.

There are also minimum account balances to consider. Some robo-advisors require an initial investment of at least $5,000, while others have minimums as low as $100 or free.

• In September, Vanguard announced that it was reducing the minimum asset requirement for its robo-advisor service from $3,000 to $100
• Betterment, a popular robo advisor, doesn’t have a minimum balance requirement to open an account
• Another popular option, Wealthfront, requires a $500 minimum deposit to start investing

Depending on how the robo-advisor invests your money, there may be fees on top of the management fee. The mutual funds and ETFs that the robo-advisor invests in often charge an expense ratio on their own, which is an additional fee you’ll have to pay.

At the end of the day, many people prefer speaking directly with a human adviser and feel more comfortable knowing a person is looking after their money.

In fact, several robo-advisors now offer a human adviser option.