The 7 Main Differences Between Robo-Advisors


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Michael J. Peterson







With a rising number of Robo-Advisors out there it is getting harder and harder to understand the differences between each service.

There are, however, 7 main differences that will allow you to distinguish between the features of each service.

Every investing situation is different, therefore it is paramount to learn about the some of the main deciding factors.

We have ranked the 7 differences by importance.

Now, without further ado, let’s dive right into it.

7 Differences between Robo-Advisors

Robo-advisors differ from brokerage to brokerage. Of course, each service will make you want to believe that their offering is the best.

Yet, each advisor can’t have the best performance, fees, service, algorithm and customer support. So instead of analyzing each service individually, we are going to look at more of a broad picture as far as the differences between each robo are concerned.

1. Passive VS Active

This is a key difference. Essentially passive means that the robo-advisor does all of the investing by itself. Active means that there is human intervention.

Let’s dive into the details:

What means passive?

Passive in this context means that the robot will invest on your behalf automatically. There is no human intervention.

Typically, the robot chooses low fee investment funds to match different investment indexes, examples are the S&P 500, bond indexes or international stock indexes.

Most of the time, this is considered a low risk approach. It is actually the more  popular approach among the different robo advisors. A little know fact is that most active fund managers actually fail to beat the indexes in the the long run.

What means active?

Some robo-advisors use active management, which means they use human financial planners in an attempt to beat index fund returns.

The involvement of a human advisor is an important consideration, because this directly impacts the way your money is managed.

The robo-advisors strategy will be adjusted whenever there is a change in the market or the economy as a whole.

Some examples of actively managed Robo Advisors

It is important to mention that you can’t really make out either of the approaches to be better than the other.

Every portfolio is different and the factors that eventually determine a good ROI are endless. Both active and passive robo-advisors usually diversify your portfolio to a point where the ups and downs of the financial markets are considered.

2. Investment Options 

The most typical investment of robo advisors is an ETF. (Exchange-Traded Fund)

That is usually the base of their portfolios however some offer additional investment options as well.

Although the majority of robo advisors concentrate on stock and bond funds, others include investments in

  • Real estate
  • Commodities
  • Alternative types of investments (for example crypto currencies)

The choice is increasing by the day, there is really something for any type of investor.

ETFs differ in the stocks and bonds that they invest in. For example, some robo-advisors offer a few diversified stock and bond investments. whereas others will allow you to invest in thousands of various funds.

Can you also invest in individual stocks?

A few robo-advisors will have that as an option. Personal Capital for example lets you invest in individual stocks. (using direct indexing) Wealthfront and Betterment also offer direct indexing which in many cases can actually be less costly and more flexible than investing in ETFs.

Religious-specific investment options

A rising number of advisors offer Halal investing. In this cases, Halal investing rules are considered by the algorithm. Wealthfront is a great example.

Socially responsible investing

If you want to make a difference with your, there are now more options than ever to do some good by investing responsibly. Among many others, Openinvest, Betterment or the previously mentioned Wealthsimple offers socially-conscious investing options.

3. Services

Another big difference in the various types of robo advisors is what kind of services they offer. Every investors goals are different so this may actually be the deciding factor when it comes to selecting the right robo according to your needs.

We are going to discuss 3 popular services:

1. Retirement planning

The majority of investors will look for retirement planning at least at some point in their career. Wealthfront, Betterment and Personal Capital offer such options. Find out which advisory we recommend for retirees here.

2. Rebalancing

This is a service that most Robo-advisors offer. The greatest benefit here, is that it allows a hands-off investing approach.

What exactly is rebalancing?

Rebalancing is a process that helps keep your portfolio diverse and compensates when the percentages of your investment aren’t lining up right. An experienced investor can do his by himself but especially beginners can use some help in this regard. The algorithm will take care of the process and you don’t even need to get involved.

3. Tax-loss harvesting

What exactly does tax-loss harvesting mean?

Tax-loss harvesting is the selling of securities at a loss to offset a capital gains tax liability. So if your investment has an unrealized loss, this loss is sold allowing a credit against any realized gains which occurred in your portfolio. The sold asset is then replaced with a similar asset to maintain the portfolio’s asset allocation.

Ultimately, this will lead to more money in your pocket!

Among the Robo-advisors that offer tax-loss harvesting are

4. Account Types

The most common are IRA accounts.

Some robo-advisors stick to only traditional or Roth IRAs, many others are beginning to add simple and SEP IRAs.

In other cases robo-advisors are available for UTMA accounts, trusts, and even business accounts, and 529 plans. (SigFig and Wealthfront come to mind)

401(k) plans for businesses is also becoming more and more popular. Right now, Betterment is probably a great choice however Blooom is the one service that specializes in 401(k)s.

5. Account size minimum

You don’t really need to have a lot of money to invest in a robo-advisor, there are certainly many robos out there that are within anyone’s reach, so let’s look at some examples:

If you just want to dip your toes into the robo advisor world, here are some recommendations:

  • Wealthfront: $500
  • Motif: $300
  • M1 Finance: $100
  • Betterment: no minimum investment!

There are however, also the big players, in general the higher minimums can be attributed to more personalised, human advice. The longevity and reputation of these companies also play a huge factor. Examples are:

  • Vanguard Personal Advisor Services: $50,000
  • FutureAdvisor: $10,000
  • TD Ameritrade Essential Portfolios: $5,000

6. Advice Options

When I say some robo advisors are completely algorithm managed that is true. However that does not mean that you won’t be able to contact a human within the company.

The ones who rely solely on the algorithms do offer financial advice as well. Prime examples here are M1 Finance and RobinHood. (Check out the comparison here)

All robo-advisors that we have reviewed offer the option to contact a human, after all you can’t expect a beginner to be familiar with all the ins and outs, especially when it comes to the interface and platform of the robo-advisor itself.

The one that stands out is Betterment.

Betterment has a system in place where you pay for the amount of human intervention that you requiere with your investment. An interesting feature is that you can actually text message the human advisor.

Ellevest and Wealthsimple charge 0.50% of your asset under management and have access to financial planners.

7. Fees

Now let’s get to the most interesting bit:

This one doesn’t require much guesswork.  There are extremely low-fee or even free robo-advisors available however keep in mind that even the more expensive robo-advisors have fees that are a lot lower than your average financial planner

Let’s take a look at the fees:

M1 Finance
Schwab Intelligent Porflios
0.20% - 0.50%
0.25% - 0.50%
M1 Finance
Schwab Intelligent Porflios
0.20% - 0.50%
0.25% - 0.50%

[New] Lending and cash management

Borrowing and cash management are new on the robo-advisor front.

Traditionally only banks offered this service but this is now a thing of the past.

A few examples:

  • Betterment EveryDay has a full cash management suite including debit card and high yield checking.
  • Wealthfront offers a credit for customers who don’t want to liquidate investments to pay for big expenses such as a wedding.
  • M1 Finance actually offers both lending and cash management. You can borrow a portion of your account value with a service called M1 Borrow. The M1 Spend program offers a high yield cash account among other cash management services.

What is the major difference in Robo-Advisors?

Of course it would not be smart to point to one of the factors above as the all-determining factor.

While some may be more expensive as far as the fees go,  others may have a better algorithm or offer better human advice.

Other factors that we have not yet discussed are reputation, trust and longevity.

Especially as far as longevity goes, robo-advisors are still a relatively new investment model and there is simply not enough data to really take that factor into consideration.

What I do know however, is that in general almost every robo-advisor is more affordable than your typical financial advisor.

Please take all the previously discussed factors into account before you make a decision. It may turn out to be one of the most important financial decision you will ever make.

Robo Chooser

Use the following Quiz and find out which robo advisor is best for you.


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