The primary difference between a robo advisor and an online broker is that a robo advisor offers a hands off approach to investing, where as an online broker offers a hands on approach. Robo advisors are a low cost way to have your investments picked and managed for you. Online brokers typically offer commission free investing on stocks and are worth while if you want the flexibility to choose your own investments.
Robo advisors offer a more hands off investing experience. In general, when you opt to use a robo advisor, you don't get to choose any of your investments. Instead, you are relying on the algorithms of the digital advisor to build you an investment portfolio that aligns with your goals and r. This can be great if you don't want to, or don't know how to choose your own investments.
Online brokers offer a much more hands on investing experience. When you sign up for an online broker, you get access to research tools, and platforms where you can choose and buy your own investments. Almost all online brokers offer commission free investing of stocks.
Keep in mind that most robo advisors do charge a fee. The fee can vary, but in general expect to pay between a 0.25% and 0.5% fee. When you compare this to a human advisor, who typically charge at least a 1% fee, the cost of a robo advisor is quite low. There are even robo advisors, such as
Sofi Automated Investing, that don't charge a fee at all.
If you plan to purely invest on your own through an online broker, and not use any of the advisory services that brokers offer, an online broker can be a cheaper option. However, keep in mind that you are paying a robo advisor to not only choose your investments for you, but also actively manage those investments as needed.
One final factor that might make a robo advisor better than an online broker is that it can help you determine your
risk tolerance. Essentially, your risk tolerance is the amount of volatility and loss you are willing to accept as an investor. When you first sign up for a robo advisor, you will be asked a series of questions.
Based upon your answers to these questions, the robo advisor will tell you what level of risk tolerance you have, and then choose investments that match up with it. If you don't know your risk tolerance, it can be dangerous to start randomly buying your own investments through a broker as you don't know if you could handle the risk associated with those investments.
Ultimately, a robo advisor might be better than an online broker if you want a hands off investing experience, are ok paying a low management fee, and want help determining your risk tolerance. Please keep in mind that a robo advisor is not a full fledged financial advisor.
The point behind a robo advisor is to offer everyone access to a low cost investing opportunity. A robo advisor does not create a complete financial plan. With that being said, if a robo advisor sounds like a good fit, you can check out our picks for the
top robo advisors of 2023. If you would rather be a do it yourself investor, you can check out our picks for the
top online brokers of 2023.
