What is a robo-advisor and what are its typical advantages?

• A. A savings account with guaranteed returns
• B. A human financial planner who works for a big bank
• C. A trading algorithm that executes high-frequency trades
• D. An online automated investment service that builds and manages a diversified portfolio with lower fees and minimal human advice

Answer: (D)

Robo-advisor refers to an online automated investment service that builds and manages a diversified portfolio with minimal human guidance. It uses algorithms to determine an appropriate asset mix, typically invests in low-cost funds, and automatically rebalances to maintain the target allocation. The main advantages are lower fees than traditional financial advisors, often low or no minimums, ease of use, and automatic diversification and rebalancing—with some services offering tax-efficient features as well. It’s not a savings account with guaranteed returns, not a human planner, and not a high-frequency trading system.