A Robo-Advisor — short for "robotic advisor" — is, put simply, a digital wealth manager. Instead of a human advisor, software oversees the investment process. After investors provide personal information and complete a risk-profiling questionnaire — covering factors such as risk tolerance, investment horizon, and financial objectives — the Robo-Advisor proposes a portfolio. This portfolio typically consists of several ETFs to provide broad exposure across equities, bonds and, where relevant, additional asset classes. Automated rebalancing ensures that the originally defined allocation remains intact: If individual positions develop differently over time, the algorithm restores the intended balance by buying or selling assets accordingly.

This automated approach is designed to avoid emotional decision-making — the Robo follows its rules consistently and does not react to panic or euphoria. At the same time, Robo-Advisors keep costs relatively low. Whereas professional portfolio management was historically available only to investors with substantial wealth and personal advisory services, today anyone can access a professionally managed ETF portfolio with comparatively small amounts through a Robo-Advisor. It is therefore no surprise that dozens of providers have entered the market in recent years, with billions in assets now managed algorithmically worldwide. Digital investing has thus become a genuine alternative for private investors — at least at first glance.

Robo-Advisors offer several advantages that have contributed significantly to their popularity.
Convenient and time-saving — a Robo-Advisor takes over the demanding work of building and maintaining a portfolio. Once set up, most processes run automatically. This makes it ideal for investors who do not want to spend extensive time following markets or making frequent decisions.

• Low fees: Because no human management team needs to be financed, management fees are often significantly lower than those of traditional funds. Many Robo-Advisors charge a flat fee of around 0.5 percent per year based on assets invested. Costs for the underlying ETFs are typically very low as well. Overall, this keeps total expenses down and leaves more of the return with the investor.
• Broad diversification: By investing in global ETFs, Robo portfolios achieve very broad diversification across markets, sectors and regions with just a few building blocks. Building such diversification on one’s own would require effort and expertise. A Robo-Advisor makes this “don’t put all your eggs in one basket” approach easy to implement.
• Discipline and consistency: Robo-Advisors invest strictly according to a predefined framework. Rebalancing — resetting the portfolio to its target allocation — takes place at fixed intervals or when thresholds are exceeded. This disciplined approach helps prevent investors from taking on too much risk in rising markets or selling in panic during downturns — common pitfalls driven by human emotion.

These advantages make Robo-Advisors particularly appealing for beginners and for passive, long-term investors. They offer an automated, transparent and cost-efficient “set-and-forget” solution.

Despite their convenience, Robo-Advisors come with limitations investors should be aware of. The most important drawbacks and risks include:

• Standardised strategies: Most Robo-Advisors follow the same basic principle — passive investing in broad market indices and strictly maintaining the chosen risk allocation. Opportunities for excess return remain largely untapped because the algorithm does not react flexibly to new market dynamics; it simply follows its predefined pattern. As a result, clients with similar risk profiles often receive almost identical “template-based” portfolios. Individual circumstances or specific market views are barely reflected.
• Limited customisation: Beyond broad risk categories (e.g., defensive, balanced, dynamic), personalisation options are minimal. Investors seeking, for example, a sustainability focus (ESG criteria) may find that some Robos offer sustainable ETF portfolios — but the menu is limited. If a particular strategy is not available (e.g., real assets, commodities, specific ESG filters), clients cannot tailor the portfolio. A bespoke solution — common with human advisors — is not part of most Robo models.
• Algorithms without judgement: A Robo-Advisor only knows the data and rules it has been programmed with. It cannot intelligently anticipate unexpected market events or structural shifts. Some algorithms, for instance, have historically reduced equity exposure aggressively during volatile periods to keep risk within limits — only to miss the subsequent rebound. An experienced manager might have assessed the situation differently and acted more flexibly. This rigidity can reduce returns in certain phases.
• Concentration risks despite ETFs: While ETF portfolios are considered broadly diversified, index funds can themselves carry concentration risks. In global equity indices such as the MSCI World, more than 60 percent of the weight lies in US stocks — a large share of that concentrated in a handful of mega-cap tech companies. Investors following only these standard indices are therefore heavily dependent on the performance of these few market leaders. Robo-Advisors typically use standard ETFs and thereby inherit their structural biases. A human manager could counteract this — for example, by adjusting regional or sector allocations — whereas an algorithm simply tracks the index.
• No personal guidance: Finally, Robo-Advisors lack the human element. There is no personal contact to support investors during uncertainty or to offer tailored advice. Especially in volatile markets, human guidance can be crucial — explaining what is happening and whether adjustments make sense. Some investors rely on this to stay disciplined over the long term, something a purely digital solution cannot provide.

In summary, Robo-Advisors are not a one-size-fits-all solution. They simplify investing, but come with structural constraints. Investors with higher expectations or those who want active responsiveness to market conditions often reach the limits of a fully automated approach.

The counterpart to the purely algorithm-driven approach of a Robo-Advisor is active management by experienced investment professionals. Instead of mechanically tracking an index, an active portfolio management team makes deliberate decisions: Which regions, sectors or individual securities currently offer attractive opportunities? Where should risks be reduced? The objective is often to outperform the market or at least cushion losses during downturns.

An actively managed fund can, for example, lower its equity exposure when turbulence is looming or overweight specific investment themes — adjustments a standardised Robo algorithm cannot make. Naturally, active management comes at a higher cost than an automated service. Portfolio managers, research analysts and flexible reallocations incur greater expenses than a purely ETF-based approach.

However, what ultimately matters to investors is net return after costs. And here, it becomes clear that lower cost does not automatically mean better outcome. Consider a scenario in which an actively managed strategy achieves ten percent through skilled allocation, while a passive Robo ETF portfolio delivers six percent. Even if the active fund charges two percent in fees and the Robo-Advisor only 0.5 percent, the investor still ends up with a materially higher net return (~8 percent vs. ~5.5 percent). This simplified example illustrates a key point: What counts is what remains for the investor after costs — and in many cases, skilled active managers can add value even after fees.

In practice, many Robo-Advisors have so far struggled to outperform traditional investment concepts. They typically mirror broad market indices; their main advantage lies in lower costs, not necessarily in higher returns. Active strategies, on the other hand, can leverage expertise, research and timing to generate additional value. Particularly in challenging market phases, active risk management proves its strength: Professionals can diversify more broadly, limit individual position risks and rebalance portfolios when needed.

ESG integration is another area where active approaches often offer deeper implementation — through targeted security selection or active stewardship — while Robos generally buy pre-packaged ESG indices without further refinement.

Of course, active management is not a guarantee for outperformance. Results depend on the quality of the strategy and the management team. Investors should therefore evaluate providers carefully. Indicators of quality include assets under management (AuM), which can reflect investor confidence and long-term experience. Independent ratings, awards or consistent peer-group comparisons also help assess whether a provider delivers what it promises.

Robo-Advisors can be a sensible option for certain investor types — for example, beginners or busy individuals who want to invest cost-efficiently and broadly diversified without managing every detail themselves. These automated solutions offer convenience and low fees, which are undoubtedly appealing. However, they are not a universal answer for all investment needs.

Once your requirements go beyond a standardised solution, the Robo approach reaches its limits. Investors who want to take advantage of short-term opportunities or aim for stable long-term returns with active risk management will often find a purely passive, algorithm-driven portfolio insufficient. Ultimately, the suitability of a Robo-Advisor depends entirely on your objectives and expectations.

For basic wealth accumulation with smaller amounts, a Robo-Advisor can indeed be worthwhile. For larger portfolios, specific investment preferences (such as dedicated sustainability criteria) or the desire for active oversight and professional expertise, traditional actively managed solutions tend to deliver greater value.

The initial question can therefore be answered clearly: A Robo-Advisor can play a role — as a foundational solution, yes. But it is not a substitute for an experienced investment professional.