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Robo-advisors vs brokers: What you need to know

We all have different investing preferences. So, if you're deciding between a robo-advisor and a brokerage account, here's everything you need to know.

If you want to get started investing but have no clue where to start, you’re not alone. One common question many beginner investors have is: what’s the difference between a robo-advisor and a discount broker?

While both types of firms allow you to invest money, they focus on very different things. Let’s explore the differences between robo-advisors and discount brokers, and then look at some recommendations of each.

What is a robo-advisor?

A robo-advisor is an investment firm that manages your money for you on your behalf. They typically help you with investment selection, rebalancing your portfolio on a regular basis and may even try to optimize your returns using methods such as tax harvesting.

These firms usually charge a management or monthly fee in addition to any underlying investment fees you’d normally be charged on your investments.

They’re perfect for beginners

Beginner investors may like that robo-advisors help deal with some of the complexities of investing that you may not tackle until a few years after you start investing. However, robo-advisors charge for these services that you may not benefit from very much in the first few years you invest.

Low fees

Even so, the fees associated with a robo-advisors charge vs financial advisors are typically much lower.

Low minimum investment requirements

Additionally, many robo-advisors have no or lower minimum investment requirements while financial advisors may have higher initial investment requirements that could scare off beginner investors or leave some out in the cold.

That said, robo-advisors could still charge more than what a brokerage firm would charge if you took care of the robo-advisor functions yourself and self-directed your own investments. Over time, the additional fees could add up to thousands of dollars when you consider the compounding returns you may miss out on.

When should you use a robo-advisor?

As you can see from above, robo-advisors are great for beginners, but they’re also great for those who want hands-off investing and/or those with little to invest. Robo-advisors typically have a lower minimum investment than big brokerage firms.

You should also use a robo-advisor if:

You understand and don’t mind paying fees

Again, as we said above, fees are a big concern when considering a robo-advisor. Those fees may be worth it for someone who understands the importance of investing, but doesn’t have the time to (or simply doesn’t want to) pay close attention to what they’re investing in.

That brings us to our next point.

You’re okay with someone else doing your investing

Robo-advisors offers great peace of mind, because they choose your investments based on what you tell them, and they automatically keep you diversified. This means less risk for you.

» MORE: Are robo-advisors worth it?

What is a broker?

A stock broker or brokerage is a platform for buying and selling individual stocks and funds. You deposit cash with a broker (or borrow money on margin) for the purpose of trading securities.

With a broker, you’re on your own as an investor

Brokers  do not help you choose what to invest in based on your risk tolerance and won’t automatically rebalance your portfolio for you. Everything is completely up to you at a  brokerage firm. They may provide some tools and features that make it easier on you, like watchlists and screeners, but you’re in charge.

With a traditional broker, you may be charged a fee to purchase or sell certain investments and be able to purchase and sell other investments for free. If you want to rebalance your portfolio or attempt tax harvesting, you’ll have to learn to do it yourself and request the necessary transactions to make it happen.

They typically have minimum investment requirements

Brokers may also have minimum investment requirements to invest in certain mutual funds or other investments. If you don’t have the minimum required amount, they usually offer other investments with a very low or no minimum investment requirement that you can use until you reach the higher minimums of the funds you want to invest in.

When should you use a broker?

A broker is best for the hands-on investor. You can choose the investments you want to make, including socially responsible investments. The broker is there simply to help you.

So, you should use a broker if:

You want to buy your own stocks and ETFs

If you’re a casual investor ready to make your own investments or a new investor learning how to invest eventually ready to jump in with some favorite stocks and ETFs, then going with a discount broker and directing your own trades may be for you.

You want to trade commission-free

It’s the norm nowadays to see trading platforms that do not charge commissions on stocks, ETFs and options on orders placed online (though contract fees on options can still pretty commonplace). If you’re interested in building a portfolio that tracks the market, say U.S. with VTI or VOO, or international added in with VT, then you can save on paying a robo-advisor and do it yourself.

In the end you only end up paying the expense fees on the ETFs that are traded commission-free, with less eating away on your long-term gains.

Recommended robo-advisors

Robo-advisors are still fairly new to the investing world. In fact, the first robo-advisors appeared in 2008. Seems like just yesterday. Here are some of the current more popular robo-advisors we recommend and some details on how they work.

Wealthfront

Wealthfront is a robo-advisor where you honestly don’t need to now a ton abut investing to put your money to work. Share your goals and risk-tolerance and Wealthfront can help design a portfolio for you starting with $500.

Most recommended robo-advisor
Wealthfront

Wealthfront is designed for young professionals, anyone from passive investors who want expert digital guidance, to people who want to be smarter with money.

With low fees and multiple tax perks, automated investment management tuned in to your individual risk level make Wealthfront worth a look.

Offer: Open your first investing account and get a $50 deposit bonus. Promotional terms apply.
Pros:
  • Passive investing with automated management
  • Tax-loss harvesting
  • Ability to customize portfolios
Cons:
  • No fractional shares of ETFs in automated accounts
  • No human advisors
Get $50 bonus
MoneyUnder30 receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. MoneyUnder30 is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

The annual advisory fee with Wealthfront is 0.25%, so much less than you’d pay a financial advisor to tailor a portfolio for you. There’s added features in with that like Smart Beta, direct indexing, and advanced tax-loss harvesting, all of which are covered in our dedicated review linked below.

Ultimately Wealthfront may be the most complete robo-advisor service available today that we’ve looked at, and with a low annual fee, it’s also one of the best for anyone looking to go with a robo-advisor.

» MORE: Sign up for Wealthfront or read our full Wealthfront review.

Acorns

If you’re a beginner or consider yourself a casual investor who has problems sticking to investing or saving, then you may want to go with Acorns.

Great for new investors
Acorns

Acorns makes it easy to start investing (even if you know nothing) and provides helpful tools to help you save more automatically. In under 3 minutes, start investing spare change, saving for retirement, earning more, spending smarter, and more.

Offer: Claim a bonus today in three easy steps: open account, set up recurring investments, make your first successful recurring investment (min. $5). Receive a $20 bonus investment.
Pros:
  • Effortless automated investing
  • Easy-to-use savings features
  • Low-cost solution to manage money
Cons:
  • Flat monthly fee more expensive for smaller accounts
  • Can use more robo-advisor features
Get $20 bonus

Acorns is in-part a spare change investing app with a Round-Ups feature that rounds up linked credit card and debit card purchases, investing them in your pre-selected tailored portfolio once the amount accumulates to $5. It’s investing that matches up with your daily routine you don’t even have to think about. There’s also Smart Deposit, which takes a portion of your regularly-scheduled deposits (like your paycheck) and deposits them into your investment or retirement account with Acorns.

Acorns is a swiss-army knife option with more products under its umbrella that’s not intimidating for beginners or hard to understand, starting at $3/month.

» MORE: Open an account with Acorns or read our Acorns review.

Recommended brokers

While all brokers work in a similar way to help you buy and sell securities, each have slightly different features and “feel”. Some brokers, like Robinhood, are focused on making trading easy to learn for beginning investors. Others, like Interactive Brokers, make it possible for individual investors to access professional-level research tools, trade fulfillment speed and access to global markets.

Interactive Brokers

Interactive Brokers is a longstanding favorite trading platform of professionals and serious individual investors that you can use, too. Featuring commission-free stocks, powerful trading tools and access to foreign markets and cryptocurrency trading, there’s little IB can’t do. Whether your primary goal is simply to invest in individual stocks and ETFs or you want to be able to trade options, on foreign markets, or on margin, Interactive Brokers can’t be beat.

Interactive Brokers

Interactive Brokers is a longstanding favorite trading platform for professional and serious individual investors alike. IB gets you access to institutional-grade trading tools, foreign stock markets, and popular cryptocurrencies.

IB features commission-free stock trades, $0.65 options contracts, and there's no minimum to open an account.

Pros:
  • Professional-grade trading tools
  • Trade on foreign markets
  • Low margin rates
Cons:
  • Institutional features can be overkill for basic investors
Open An Account

Interactive Brokers offers more investment options than almost any other U.S. stock broker open to individual investors. Clients from over 200 countries can trade on 150 global markets from a single unified platform. They can also fund their account and trade assets in 27 currencies. You can also trade Bitcoin, Ethereum, Litecoin and Bitcoin Cash.

Interactive Brokers has two pricing models: Pro and Lite. Interactive Brokers Lite will appeal to most casual traders. You’ll enjoy $0 U.S. stock and ETF trades and the same option pricing as Pro. The biggest difference between Lite and Pro is the priority and cost of order execution. Interactive Brokers earns money from Lite customers through “payment for order flow”, just like Robinhood and most commission-free stock brokers.

A Pro plan at Interactive Brokers unlocks the ability to trade thousands of shares of stock at a time without sending ripples through the market that may result in a less favorable trading price. That’s great if you’re running a hedge fund, but not something most individual investors need to worry about.

All Interactive Brokers customers can apply for options trading, which come with a tiered commission schedule. Premiums greater than $0.10 cost $0.65 per contract ($1 minimum; no max). The rate drops to $0.50 per contract for premiums between $0.05 and $0.10 and $0.25 per contract for premiums less than $0.05.

Interactive Brokers is also the place to go for the lowest margin rates. For investors who qualify, margin allows you to trade stocks on credit or even take a cash loan secured by your investments.

» MORE: Open an account with Interactive Brokers

Robinhood

Robinhood was founded in 2013 and took the investment world by storm when it announced it’d offer commission-free trades on its platform. It’s why nowadays, typical brokerage accounts are synonymous with stock brokers — seeing wide-spread commissions has become a rarity.

Beginner-friendly
Robinhood

Robinhood is a popular stock trading and investing app that offers zero-commission trades on thousands of investments, including stocks, starting with as little as $1.

With beginner-friendly features and easy-to-read charts, Robinhood is great for new investors and there's advanced features even more seasoned investors can appreciate.

Offer: Get a 3% IRA match on every eligible contribution, every year. Requires Robinhood Gold (subscription fee applies).
Pros:
  • Commission-free trading
  • Easy to use, well-displayed dashboard
  • No obligation or minimum account balance
Cons:
  • No bonds or mutual funds
  • Crypto fees can be more transparent
Open Account
Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.

With no commissions, Robinhood is one of the best trading apps for new investors to begin trading stocks, crypto, ETFs, and even IPOs in some companies starting with as little as $1 on their own.

The Robinhood website has an in-depth section to help you learn about investing basics, the markets, and trading lingo. These resources can help you figure out how to get started investing. Not quite a robo-advisor, but there’s also tools to help you manage your portfolio, too.

» MORE: Open a Robinhood account or read our full Robinhood review.

J. P. Morgan Self-Directed Investing

J. P. Morgan Self-Directed Investing is trading platform within the Chase ecosystem that works well for existing Chase customers, but also inviting for new investors who want venture on with investment option associated with a major bank.

J.P. Morgan Self-Directed Investing provides unlimited commission-free online stock, ETF and options trades. Plus, there’s a number of powerful investment tools, multiple account options, and an offer for signing up.

You can’t trade fractional shares on J.P. Morgan Self-Directed Investing and you might find some international investment vehicles to be missing as an option (recommend Robinhood if this is of concern), but if you’re an existing Chase customer or want to trade online commission-free on a clean, easy-to-understand interface then SDI may be for you.

» MORE: Open a J.P. Morgan Self-Directed Investing account or read our full J.P. Morgan Self-Directed Investing review.

Disclosure – INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Summary

Now that you understand the difference between robo-advisors and brokers, you can decide which of the top investment accounts is right for you.

While some brokers offer robo-advisory services, not all do. On the other hand, robo-advisors typically don’t offer traditional brokerage features, though some may provide opportunity to pick individual stocks for a higher fee. Once you’ve made your decision, compare multiple robo-advisors and brokerages to find the one that’s best for you.

About the author

Avatar

Lance Cothern

Lance is a personal finance expert who graduated from James Madison University's College of Business in 2009 and earned his Certified Public Accountant license in 2010. He has written for a number of publications including Forbes, Business Insider and here on Money Under 30.

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