Should You Choose a Robo-Advisor or a Discount Broker?

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The choice could impact your investment account balance and how much work you have to do.

Investing your money for the future is one of the most crucial financial steps you can take. The good news is, many online apps and services make it easier than ever to get started investing. These options include robo-advisors as well as online discount brokers.

While both robo-advisors and online brokers allow you to get your money into the market, they work in different ways. So, how can you decide which is right for you? Ask yourself these questions.

1. Do you want to manage your investments or have someone manage them for you?

If you sign up for an online brokerage firm, you will need to make decisions on your own about what to invest in. This can require a little bit of time and effort on your part. You'll need to decide what kinds of assets to invest in, research specific assets, and build a diversified portfolio.

If you don't want to learn too much about investing but want to maintain an appropriate portfolio based on your risk tolerance, then a robo-advisor could be a better solution for you. Robo-advisors ask you about your investment goals and manage your money for you. They provide a totally hands-off solution.

2. Are you OK with paying investment fees?

Robo-advisors charge a fee for managing your investment dollars. While this fee often isn't huge -- it's usually around 0.25% or 0.30% -- it still eats away at your potential returns. That's especially true if you're investing your money for a long time, such as over decades for retirement. And this fee is in addition to any other fees that are charged based on what you invest in. For example, an exchange-traded fund (ETF) that the robo-advisor invests you in may charge a fee of its own.

If you don't want to pay fees, a discount brokerage firm is a better bet. Most have eliminated minimum balance requirements, inactivity fees, and commissions. While you'll still have to pay the costs associated with your investment (such as those ETF fees), you won't have to worry about added costs on top of that. This can leave you with a lot more money in the end.

3. What do you want to invest in?

Most robo-advisors put your money into a mix of different index funds, which are funds that track financial indexes. You probably aren't going to beat the market much with these funds since your money is spread around so many assets (you buy a very small ownership interest in every stock in the index).

If you want to invest in individual stocks in different companies, choose specific cryptocurrency investments, or buy niche ETFs, then a discount brokerage firm is likely a better fit.

Ultimately, you'll need to consider your investment goals and your level of interest in investing to decide what's best for you. Both a discount brokerage firm and a robo-advisor are good options, but the right choice depends on your needs.

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