Robo-Advisor vs. Self-Directed Investing: What’s the Difference?

Self-directed investing means you manage your investments, whereas robo-advisors automate the process for you

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Reviewed by Andy Smith

Robo-Advisor vs. Self-Directed Investing: An Overview

For today’s investors, personal control and automation may seem like opposing forces.

On the one hand, self-directed investing implies investor control over their investments. They do the necessary research, select their investments, and manage their portfolios according to their preferences and investment, financial, and economic outlooks.

Self-directed investing puts control and freedom of choice in the hands of investors. It’s a more traditional way of investing.

On the other hand, robo-advisors are wholly automated digital investment platforms that deliver a hands-off approach to investors. They use complicated algorithms to make ongoing investment decisions for you. They may offer some access to human assistance.

Each of these investment approaches offers an investing solution that may be right for different people. So it’s important to understand their differences, advantages, and disadvantages.

That knowledge will help you decide which one aligns best with your personal approach to investing, your financial goals, and your comfort with risk.

Key Takeaways

• With self-directed investing, investors make their own investment choices and control how they manage their portfolios.
• It means that oversight and the potential for higher returns rest in your hands.
• However, successful self-directed investing requires significant time and effort, as well as a solid understanding of investment securities and financial markets.
• Robo-advisors provide investors with an automated, low-effort investing experience, but they may limit your investment options and come with their own set of fees.
• The choice between self-directed investing and a robo-advisor depends on your personal preferences and interest in investing, financial goals, investment knowledge, and available time.

What Is a Robo-Advisor?

At its core, a robo-advisor is a digital investment platform that uses algorithms to manage and rebalance your portfolio.

You simply set your financial goals and risk tolerance, and the robo-advisor takes care of the rest. They’re the digital equivalent of an autopilot for your investments.

Over the past few decades, robo-advisors have evolved and grown significantly. Initially, they were focused on providing automated portfolio management, but today, they offer a range of services, from tax-loss harvesting to retirement planning.

Recognizing the growing demand for a blend of technology and financial management, many traditional financial institutions have launched their own robo-advisory services.

Today, hundreds of robo-advisors are available globally, with billions of dollars in assets under management (AUM).

They offer a low-cost, accessible investment option, especially for those investors who are just starting out or prefer a hands-off approach.

By handling the complexities of investment management, robo-advisors allow you to focus on setting and achieving your financial goals.

Note

Investopedia offers a recommended list of robo-advisors. As of March 2025, Wealthfront is best overall, while Betterment is great for beginners and M1 Finance ranks highest for experienced investors. View them all here.

Advantages and Disadvantages of Robo-Advisors

Robo-advisors shine in their simplicity and ease of use. They handle the heavy lifting of investment management, making them great for beginners or those with a passive investment style.

However, they may not offer the same depth of investment choice as self-directed investing, and their fees, while typically lower than traditional advisors, can add up over time.

Pros

• Automated, hands-off investing

• Typically, low cost

• Low minimums

• Well-diversified portfolios based on proven strategies

• Takes emotion out of trading

Cons

• Lack of flexibility

• Limited asset class selections

• Lack the human touch

• Fees can add up over time

What Is Self-Directed Investing?

Self-directed investing involves managing your own investment portfolio. You choose your investments, whether stocks, bonds, exchange-traded funds (ETFs), mutual funds, or other assets, based on your own research and risk tolerance.

It’s a more hands-on approach to investing, offering you maximum control over your investments. And while considered more traditional than robo-advisors, it itself is a big step away from the classic standard of a full-service broker.

The advent of the internet and online brokerages has made self-directed investing quite accessible.

Online brokers provide a wealth of tools and resources to support individual investors, from research reports, technical analysis tools, and market data to educational content and advanced trading features.

With these at your fingertips, you can make informed decisions about how to allocate your money and manage it on an ongoing basis.

However, these resources cannot replace the fundamental need for financial literacy and an understanding of market dynamics.

For successful investing, it’s essential that you educate yourself about the variety of securities available, different asset classes, various types of risks, market trends, and investment principles.

You’re responsible for making informed decisions and managing risk. It requires time, effort, and updated financial knowledge to be done effectively.

Important

Self-directed investing is about taking ownership of your financial future. You steer your investments according to your vision, whether that involves aggressive growth strategies, conservative income generation and capital preservation, or something in-between. It’s not for everyone, but for those willing to put in the work, it offers the potential for personal satisfaction that’s hard to match.

Advantages and Disadvantages of Self-Directed Investing

Self-directed investing offers the potential for greater returns, as you have the freedom to pursue your own investment strategies.

However, it also requires a significant time investment for research and management, as well as a solid understanding of the financial markets.

Therefore, the risks are substantial, as the responsibility for investment decisions rests solely on you.

Pros

• Flexibility and autonomy

• Potential for superior returns

• Low cost

Cons

• Requires time, effort, and due diligence

• Potential for inferior returns

• Can result in overtrading or trades based on emotions

Robo-Advisor vs. Self-Directed Investing: Key Differences

Robo-Advisor vs. Self-Directed Investing: Which Is Better for You?

There’s no one-size-fits-all answer to this question. If you value control, have a good grasp of investing, and are willing to put in the time, then self-directed investing may be a good fit.

If you prefer a hands-off approach or are just beginning to invest, then a robo-advisor could be a better choice.

It ultimately comes down to your personal preferences, investment goals, and lifestyle. For example, the best robo-advisors offer specialized services like tax-loss harvesting, which may be important for some investors.

Indeed, the choice between a robo-advisor and self-directed investing is personal. It’s about finding the right balance between control and convenience, risk and reward, and involvement and simplicity.

By understanding your level of interest in investing, investment style, financial goals, and lifestyle, you can make an informed decision about which approach is the best fit for you.

Remember, the goal is not just to choose a method, but to choose the one that will best help you achieve your investment and financial goals.

Should I Use a Robo-Advisor or Do It Myself?

It depends on your interest in investing, investment knowledge, time, and personal preferences. Both approaches have strengths and weaknesses.

Robo-advisors can offer low-cost, diversified, and automated portfolios that are suitable for beginners or busy investors who want to save time and hassle. Doing it yourself can give you more control, flexibility, and customization over your investments, and may cost less. But it also requires more research, monitoring, and, very importantly, discipline.

What Are the Disadvantages of Using a Robo-Advisor?

Limited investment options, lack of flexibility, and fees are the main drawbacks of robo-advisors. They typically invest in ETFs or index funds that track the performance of a market or a sector. This means that you may not be able to invest in individual stocks, bonds, or alternative assets of interest. Moreover, robo-advisors charge an annual fee based on a percentage of your AUM, which can add up over time and reduce your returns. Robo-advisors also often lack the human touch that some clients desire.

How Expensive Are Robo-Advisors?

Robo-advisor fees vary by platform, but are generally lower than traditional human advisors. They usually charge a percentage of the assets they manage, ranging from 0% to 0.5% per year, with the typical fee being 0.25% per year of managed assets. Some robo-advisors may also offer premium plans that include access to human advisors or more advanced features, but for such they charge higher fees. For example, Betterment charges 0.25% per year for digital advice and 0.65% to add access to phone and email advice from its professionals.

How Big Is the Robo-Advisor Market?

According to Morningstar, it’s not as big as it had hoped to become, even though it has grown over the past 20 years. It cites research that shows that 2024 robo-advisor AUM were $634 billion to $754 billion. That’s a small portion of the $36.8 trillion U.S. retail market of accounts with assets ranging from $100,000 to $5 million.

The Bottom Line

Whether you choose a robo-advisor or self-directed investing, the most important thing is that your choice aligns with your financial goals, investment knowledge, and lifestyle.

Both investment options offer unique advantages. Understanding these can help you make an informed decision about which path to take on your investment journey.