A financial planner explains when you should consider investing with a robo-adviser — and when you shouldn’t

• “Robo-advisers” — investing apps that use algorithms to create and manage investment portfolios — are easily accessible and simple to use.
• Below, financial planner Eric Roberge explains that they lower the barrier to entry for investing by enabling users to open accounts quickly, easily, and with less cash upfront.
• However, they’re limited by the information you give them. If you need a personalized investment plan as your finances become more complicated, you might want to consider a financial adviser instead.
• SmartAsset’s free tool can help find a financial adviser to craft your investing plan »

Robo-advisers are digital platforms that use complex algorithms to create investment portfolios for you based on the information you provide when you sign up for an account. 

Many are designed to make it easier for investors to get started; Betterment, for example, requires $0 to open a brokerage account (and promises to do it for you in less than five minutes). Competitor Wealthfront has a $500 account minimum to invest, and you can open an account from your phone.

“Robo-adviser” is just a nickname, and one these companies tend not to use for themselves. The “robo” comes from the fact that the platforms are designed to fill the role of a traditional human financial adviser — but in a digital medium and with decisions being made by those algorithms rather than by individual people.

These apps provide investors with a lot of benefits (like lower fees) and tend to make it easier to get started (because they don’t require you to have a lot of cash upfront). But they’re not without their downsides, and aren’t the right solution for every investor.

Here’s what you need to know to determine if a robo-adviser will work for you.

Investing apps provide more affordable investment management

If you had money to invest in the past, you likely needed an investment manager to do it for you. Hiring a professional isn’t a bad idea; it can be a great way to feel confident that you’re making the right moves and sticking to a sound strategy to grow wealth over time. But while the right person can help you add a lot of zeros to your net worth, good financial advisers usually don’t offer cheap services in exchange for their valuable time and expertise.

It’s become easier in recent years to “DIY” your own money management, thanks to more information about how to invest being readily available via the internet. 

But teaching yourself how to invest is complicated and takes a tremendous amount of time and effort. It can be a full-time job, and most people don’t have the energy or the interest in fully learning the ins and outs of the financial markets.

Investing apps seek to provide the best of both worlds while also eliminating some of the downsides inherent in going it completely alone without having to hire a traditional adviser who charges a premium.

Investing apps can help the average person make basic investment decisions

Investing apps can help you automate your investments and eliminate the need to do lots of research or make difficult decisions about your portfolio.

You simply contribute money to your account and the app will:

• Allocate your cash across your portfolio into various funds or ETFs, based on the information you provided about your age and risk tolerance
• Automatically rebalance to keep your portfolio aligned with what the algorithm recommends
• Perform more complex portfolio maintenance functions as needed, like tax loss harvesting

Because everything is automated, runs digitally, and relies less on individual skilled professionals making decisions tailored specifically to your situation, robo-advisers can help you invest well for a much lower cost.

For these reasons, robo-advisers can be excellent solutions for people who are just getting started, looking to build up their assets, and want to automate as much of the process as possible. 

But apps aren’t human, and their abilities are limited

The biggest downside of robo-advisers is that … well, they’re not human.

An algorithm can make recommendations for you based on only the information you provide it. That info is usually limited to basic things that can be quantified: your age, when you want to stop working, and where you fall on a spectrum of conservative to aggressive in terms of risk-taking.

These factors are important. They should be considered when constructing an investment portfolio.

But algorithms can ultimately only work with black-and-white facts and data. That’d be fine if we all lived within our spreadsheets, but we don’t. We live in the real world and your real life is more nuanced than that. When you invest, you’re usually doing it for a reason: You want to create the financial means to achieve certain goals or to fund a specific lifestyle.

Your reasons why you’re investing are just as critical to making the right investment decisions as how old you are and how you feel about risk. An algorithm can’t evaluate that, nor can it provide you advice on what to do with difficult, emotional, or subjective scenarios that do crop up in real life.

For this reason, an investing app might not be the best solution for you as your life gets more complex and you have more difficult decisions to make about how to best leverage your financial resources to both grow wealth and experience your life as you go. 

An app can provide a great way to get started with investments, and may remain a good choice for you over time — but you might also come to a point where you need more than just an algorithm to figure out the optimal way to get the most value from your money and your wealth.

Think an automated investing app is right for you? Learn more about Betterment or Wealthfront »

Or, use SmartAsset’s free tool to find a financial adviser who can build your investment portfolio »

Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money.

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