Choosing a Robo-Advisor vs. Brokerage Account

Robo-advisors manage an investor’s portfolio, while brokerage accounts are self-directed

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

A robo-advisor is a digital platform that provides investment recommendations based on an individual’s goals and preferences, automating the portfolio management services they might otherwise receive from a human advisor.

A brokerage account requires investors to choose and self-direct their portfolio activity. Brokerage accounts offer freedom and flexibility to investors who want more active control over their portfolios.

Key Takeaways

• Robo-advisors provide customized advice to help investors optimize their investments.
• Self-directed brokerage accounts give investors full control over their portfolios.
• Investors looking for low-cost professional advice or low-involvement investing may benefit from a robo-advisor.
• Investors who engage in complex strategies or want a more active role in managing their assets will prefer the flexibility of self-directed brokerage accounts.

What Is a Robo-Advisor?

A robo-advisor is a digital platform that starts with an online questionnaire gauging an investor’s preferences, time horizon, and risk tolerance. Since robo-advisors offer the added benefit of helping build and manage a portfolio, they generally come with higher fees than investors pay to access an online brokerage platform. Firms include Wealthfront, Betterment, and Empower. Fidelity offers Fidelity Go, while Merrill Lynch has its Merrill Guided Investing program.

An investor portfolio is created based on the individual’s answers and the robo-advisor’s algorithms. The robo-advisor manages the investment, rebalancing the portfolio to ensure it maintains the optimal weightings of different assets to keep investors on track toward their goals. However, robo-advisors may only offer limited investment vehicles.

Robo-advisors stand out from standard brokerage accounts because of the additional portfolio management services they provide. When investors use a robo-advisor, they receive personalized recommendations from the firm’s proprietary algorithm to build a portfolio optimized to help reach their investment goals.

Important

Robo-advisors usually have reasonable minimum deposit requirements, making it easy for beginner investors.

Robo-Advisor: Advantages and Disadvantages

Pros

• Lower cost

• Reasonable minimum deposit requirements

• Hands-off investing

• Ideal for beginner investors

Cons

• Lack of human touch

• Inability to adjust to specific or new situations

• Relies on algorithms not on personal interaction

• Unable to discern an investor’s tax situation

• Limited investment offerings

What Is a Brokerage Account?

A brokerage account allows investors to choose financial assets like stocks, bonds, mutual funds, and ETFs. The assets in the account belong to the investor, and if not in a tax-advantaged account, the investor will have to pay taxes on any profits. An online brokerage account does not offer advice, and the investment decisions are entirely up to the investors.

Discount brokerage firms like Fidelity and Charles Schwab charge no platform fees for their accounts and even offer zero-commission trading on stocks and exchange-traded funds (ETFs). However, even at these low-cost brokerages, there are higher fees to trade more complex instruments like futures and options. Financial giants like JPMorgan and Wells Fargo offer versions of self-directed online accounts alongside their more traditional investment advisory services.

Various brokerage accounts offer investors personal advice and investment management, including full-service brokerage that offers a wide array of services at higher costs. Those who want to keep fees low and willing and able to research and manage their investments typically turn to online brokerages.

See Investopedia’s choices for Best Online Brokers and Trading Platforms.

Brokerage Account: Advantages and Disadvantages

Pros

• Flexibility

• May offer commission-free trading

• Can trade in individual stocks and bonds and incorporate more complex strategies

Cons

• Investors choose individual stocks, bonds, ETFs, etc.

• Requires a more hands-on approach to investing

• Adding a personal advisor will increase costs and fees

What Is the Main Disadvantage of Using a Robo-Advisor?

Robo-advisors may not be as effective as human advisors at understanding their clients’ financial situation, including tax planning and estate planning issues. Also, algorithms are based on data from the past and may not respond to new or unexpected market developments. Although a robo-advisor aims to personalize a portfolio, it typically offers a limited set of investments, excluding things like derivatives, and they don’t allow margin trading or other sophisticated strategies.

What Are the Benefits of Using an Online Brokerage?

Many online brokerages offer commission-free trading of stocks, bonds, and ETFs. Some of these accounts may also allow you to trade on margin or use futures- and options-investing strategies.

How Risky Are Robo-Advisors?

Any investment involves taking on risk, and robo-advisors are no different. Questions arise at how robo-advisors fulfill fiduciary duties—the responsibility of investment advisors to act in the best interest of a client. It is unclear how robo-advisor algorithms handle potential conflicts of interest between their firms and investors’ portfolios.

The Bottom Line

Robo-advisors provide personalized recommendations to help investors build a portfolio, while self-directed brokerage accounts leave investment decisions to the individual. A robo-advisor offers investing management services without the steeper cost of a full-service advisor, without the flexibility to pursue unique or complex strategies. A self-directed account gives investors the autonomy and the responsibility of managing their portfolio.