Robo-advisors are automated investing platforms that utilize algorithms to automate the investment of client portfolios. Technology can add a lot to the investing process, but in deciding whether or not a robo-advisor is right for you, it’s important to ask a lot of questions and do your research.

Putting a robo-advisor’s returns into perspective

When evaluating a robo-advisor, past performance is important. Investors want to see positive returns to grow their assets and meet financial goals, such as retirement.

But just like evaluating a human advisor or fund manager, performance numbers aren’t the only metric to consider when researching robo-advisors. After all, past performance isn’t an indicator of future results. Also, a large part of stock market wins and losses isn’t within an advisor’s power; nobody can control how the market will perform.

Being aware of your robo-advisor’s performance history is wise, but there are other factors to consider. Review the following metrics to make sure you understand the complete picture of what a robo-advisor can offer.

7 other factors to consider before choosing a robo-advisor

1. Fees and other costs

One of the most significant determinants of investing success are the fees and expenses that you incur as an investor. A seemingly small difference in costs can have a dramatic impact on your investments over time.

For example, a Securities and Exchange Commission report looked at a hypothetical investor who invested $100,000 with a 4% annual return. It found that with a 0.25% annual fee over 20 years, the portfolio increased to roughly $210,000. Double that fee to 0.50% and the portfolio earned $10,000 less over the same time frame; double it again to a 1% fee and the portfolio earned $30,000 less.

There are many aspects of investing you can’t control, but expenses are a major variable in which you do have a say. Be sure that you fully understand all fees and expenses that any robo-advisor you are considering assesses.

2. Account minimums

Some robo-advisors may require you to invest a minimum amount to open or maintain your account. Others may have minimums to reach a certain service tier. For instance, WealthFront requires a $500 minimum to open an account. Betterment has no account minimum for their basic service, but does require at least $100,000 for their premium service.

This could limit your options if you don’t have a large amount to invest. Make sure you understand all account minimums — not only for the robo-advisor’s basic service but also for any premium services you may be interested in taking advantage of.

3. Investment choices

WealthFront, Betterment and many other robo-advisors utilize exchange-traded funds (ETFs) as their main (or only) investment vehicle. ETFs are generally low cost, and the ease of buying and selling them makes them a good choice for managed portfolios.

Other robo-advisors might offer options beyond ETFs, but your investment choices may be limited when compared to non-robo offerings. If you want more say in what kind of assets you invest in, you may better off with a different arrangement.

4. Access to human advisors

Over the past few years, many robo-advisors have added access to a human advisor when clients need some one-on-one advice. Betterment’s premium service, for example, connects clients with CFPs for guidance on a variety of financial planning topics including retirement, college savings and others.

When comparing robo-advisors, ask yourself how important it is that you have access to a human advisor when needed. Also consider factors such as the added costs that come with these one-on-one services, the qualifications of the human advisors, and whether or not you can choose to work with a particular advisor.

5. What services are offered

Robo-advisors can differ from one another based on the resources they offer. Before deciding to go with a particular robo-advisor, try to pinpoint the type of service you need based on your unique financial situation.

For example, several major robo-advisors tout their tax-loss harvesting capabilities, a strategy that can help lower your tax bill. This is potentially a great service if you are investing money held in a taxable (non-retirement) account. If all of your money is to be invested within a tax-deferred IRA account, however, this service may not be all that useful to you.

6. How your portfolio is allocated

Many robo-advisors tout their proprietary algorithms, which determine your portfolio allocations. While nobody expects you to be an investing formula guru, you should take a look at the firm’s site and research the methodology behind the firm’s investment process. Does it make sense to you when you read it? Can customer service reps answer your questions about the process?

You don’t have to be an investing expert, but you should walk away with a basic understanding of how the robo-advisor will be investing your money. As the saying goes, don’t invest in anything you don’t understand.

7. Where your money is held

When you open an investment account, the firm holding your investments is called a custodian. Some well-known custodians include Fidelity, Charles Schwab, Vanguard and others. These three firms also happen to offer a robo service, so there is no question about where your funds will be held and by whom.

However, some robo-advisors may place your money with a third-party custodian. For instance, WealthFront indicates that they use RBC Correspondent Service (RBC is the Royal Bank of Canada) for many trading services and its IRA accounts are custodied with a firm called IRA Services Trust Company.

This is a common practice, but the robo-advisor should be clear and transparent about who is handling your money. Look hard at where your money is being held and any protections offered by the custodian. On the chance that the robo-advisor were to experience financial difficulties, you want to be sure your money is safe.

Robo-advisors can be a great option for investors. Like any type of financial advice arrangement, you may be considering, be sure to understand how the service works, how much it will cost you and whether the resources offered are a good fit with your needs.