a robo advisor sometimes without the hyphen as roboadvisor is a digital platform that provides automated algorithm driven financial planning and investment services with little to no human supervision a typical robo advisor asks questions about your financial situation and future goals through an online survey it then uses the data to offer advice and automatically invest for you 
other common designations for robo advisors include automated investment advisor automated investment management and digital advice platforms the best robo advisors offer easy account setup robust goal planning account services and portfolio management additionally they offer security features comprehensive education and low fees robo advisors history and investing strategythe first robo advisors betterment and wealthfront launched in 2008 wealthfront began as a mutual fund company it planned to assist the tech community then realized that computer software could make investment advice more accessible betterment on the other hand began with the initial purpose of rebalancing assets within target date funds tdfs it sought to help manage passive buy and hold investments through a simple online interface 1the technology was nothing new human wealth managers have been using automated portfolio allocation software since the early 2000s but until betterment and wealthfront launched wealth managers were the only ones who could buy the technology so clients had to employ a financial advisor to benefit from the innovation today most robo advisors use passive indexing strategies that are optimized using some variant of modern portfolio theory mpt 2 typically the account holder can t choose which mutual funds or exchange traded funds etfs to invest in or purchase individual stocks or bonds in their account 3some robo advisors offer optimized portfolios for socially responsible investing sri halal investing or tactical strategies that mimic hedge funds they also can handle much more sophisticated tasks such as tax loss harvesting investment selection and retirement planning explosive growththe industry has experienced explosive growth according to polaris market research the robo advisory market size was valued at 7 39 billion in 2023 and is projected to grow from 9 50 billion in 2024 to 72 00 billion by 2032 a cagr of nearly 29 4as of december 2023 the largest robo advisor by assets under management aum was vanguard digital advisor with 289 billion 56portfolio rebalancingthe majority of robo advisors use modern portfolio theory or some variant to build passive indexed portfolios for their users once portfolios are established robo advisors continue to monitor them to ensure that the optimal asset class weightings are maintained even after market moves robo advisors achieve this by using rebalancing bands 37in rebalancing bands every asset class or individual security is given a target weight and a corresponding tolerance range for example an allocation strategy might include the requirement to hold 30 in emerging market equities 30 in domestic blue chips and 40 in government bonds with a corridor of 5 for each asset class the use of rebalancing bands means that given the 5 corridor emerging market and domestic blue chip holdings can fluctuate between 25 and 35 government bonds can fluctuate between 35 and 45 when the weight of a holding moves outside of the allowable band the entire portfolio is rebalanced to reflect the initial target composition in the past this type of subtle rebalancing was frowned upon because it was time consuming and generated transaction fees however low fee robo advisors are designed to handle rebalancing automatically another type of rebalancing commonly found with robo advisors made cost effective through algorithms is tax loss harvesting tax loss harvesting is a strategy that involves selling securities at a loss to offset a capital gains tax liability this strategy is typically employed to limit the recognition of short term capital gains robo advisors do this by maintaining two or more stable etfs for each asset class so if the s p 500 etf loses value a robo advisor will automatically sell it to lock in a capital loss simultaneously it buys a different s p 500 etf it s worth bearing in mind that the irs wash sale rule prevents investors from re purchasing the same security or a security that is substantially identical within 30 days from its sell date 8 however robo investment platforms should have algorithms in place that incorporate rules like this make sure your robo advisor is programmed to select etfs appropriately so that you avoid wash sale violations benefits of robo advisors vs traditional financial advisorsthe emergence of robo advisors has broken down some of the traditional barriers between the financial services world and average consumers because of these online platforms sound financial planning is now accessible to almost everyone not just high net worth individuals some human advisors won t take on clients with less than 25 000 50 000 or sometimes even 100 000 or more in investable assets 12limitations of robo advisorsconvenient easy accesslower cost low starting capitalinvestment experience not requiredstraightforward index investinggrowing number of valuable serviceslacks human interactionlimited investment opportunitiesinvestor must define financial situation and investment goalsone size approach not right for alluneven technology standardshiring a robo advisorrobo advisors don t all cost the same amount and offer all the same features each one may excel in particular areas so it s important to do some research first dedicating a bit of time to finding the right one could turn out to be one of your smartest investments there are also hybrid robo advisors which essentially seek to combine the benefits of automated investment with human financial advice opening a robo advisor account usually entails completing a short risk profiling questionnaire and evaluating your financial situation time horizon and personal investment goals in many cases you will have the opportunity to link your bank account directly for quick and easy funding of your robo advisory account target demographicmany digital platforms target and attract certain demographics more than others for robo advisors these include millennial and generation z investors who are technology savvy and still accumulating their investable assets this population is much more comfortable sharing personal information online and entrusting technology with essential tasks such as wealth management indeed the marketing efforts of robo advisory firms typically employ social media channels to reach these investors 1415the u s securities and exchange commission sec issued a risk alert to investors in november 2021 regarding compliance issues with many robo advisors be sure to stay informed of these and other issues by checking finra investor alerts and the sec division of examination websites for information 1617robo advisors and regulationrobo advisors hold the same legal status as human advisors accordingly they must be registered with the sec and are subject to the same securities laws and regulations as traditional broker dealers 18most robo advisors are members of the financial industry regulatory authority finra you can use brokercheck to research robo advisors in the same way that you would a human advisor assets managed by robo advisors aren t insured by the federal deposit insurance corp fdic that s because they are securities held for investment purposes not bank deposits however this doesn t necessarily mean clients are unprotected for example wealthfront is insured by the securities investor protection corp sipc meaning that if the company goes bust investors will be reimbursed up to 500 000 of their invested balance 19 as you research robo advisors don t forget to check on the kind of insurance each has to protect your investment 