An investor's guide to robo-advisors

Investing doesn't always mean choosing and managing every investment yourself. Robo-advisors offer an alternative for people who want to invest without taking a fully hands-on approach.

While robo-advisors can make investing simpler, they may not be the right fit for more complex needs. Understanding the pros and cons—and how to invest with a robo-advisor—can help you decide whether it's the right fit for your investing goals.

What is a robo-advisor?

A robo-advisor is an online investment platform that uses technology and algorithms to help manage your investments. Often referred to as guided or automated investing, these platforms can recommend and manage a portfolio based on factors such as your financial goals, risk tolerance and time horizon.

Unlike self-directed investing, which requires you to research and select your own investments, a robo-advisor handles much of the investment selection and ongoing portfolio management for you. This can make investing more accessible—and potentially more affordable than buying and selling securities on your own.

How does a robo-advisor work?

When you sign up for an automated investing platform, you'll typically begin by answering a short questionnaire about your financial goals, investment time horizon, investing experience and comfort with risk. Based on your responses, the platform recommends one of several professionally designed portfolios, each built around the principles of asset allocation and diversification and aligned with different levels of risk—from conservative to growth-oriented.

"Through First Citizens' guided investing platform, you're investing in portfolios designed by our asset manager, First Citizens Asset Management, so you're really getting our best thinking," explains Patrick Lane, Manager, Client Solutions Center at First Citizens Investor Services.

After your automated investing account is funded, most robo-advisors automatically rebalance your portfolio over time to help keep your investments aligned with your target allocation.

"It really takes the time and effort out of investing," Lane adds. "You set your financial goals and risk tolerance, and the platform takes care of the rest."

Robo-advisor pros and cons

A robo-advisor offers a simple, lower-cost way to invest—making it a good fit for many beginners and long-term investors. However, it isn't the right solution for every situation. Consider the benefits and trade-offs as you decide whether automated investing aligns with your goals.

Key considerations

Is a robo-advisor right for you?

A robo-advisor may be a good fit if you're looking for a hands-off approach to investing and don't want to research individual investments or manage investments on your own. For many investors, it offers a convenient way to build a diversified portfolio while requiring relatively little ongoing maintenance.

However, automated investing isn't a direct replacement for the type of personalized financial advice you'd receive from a professional advisor. "It's designed for growth and simplicity, not income drawdown strategies," Lane explains.

If you're nearing retirement, managing multiple income sources or navigating other complex financial decisions, a financial advisor may provide more comprehensive guidance tailored to your overall financial picture.

The bottom line

A robo-advisor can be a great option if you're looking for a simple, automated way to help build wealth. But as your financial life becomes more complex, personalized advice may become more valuable. Understanding the strengths and limitations of robo-advisors can help you choose the investment approach that best aligns with your goals.