Shortly after Jared Franklin started working in 2007, he also began saving. But the now-29-year-old product manager at a Baltimore financial services start-up wasn’t sure how to create a balanced, diversified portfolio. On the recommendation of his parents, he opened an account with a financial adviser. But when his quarterly statements started coming in, he wondered what he was getting for the fees he paid. “I couldn’t understand why I was paying outrageous amounts when my balances weren’t growing much,” Franklin says.

Then, three years ago, he decided to try Wealthfront, one of a new breed of online advisers that use computer algorithms to recommend diversified, low-cost portfolios. Because Franklin has referred several of his friends to Wealthfront, he’s paying no adviser fees, but he will eventually pay 0.25 percent per year. “The strategy is simple, and at the end of the day I think the return on my investment will be better than the return I’d get on my own or with an adviser,” says Franklin. “So far I’m pleased.”

The frustration with fees that led Franklin to move his money is one that millions of individual investors share. The fact is, human financial advisers tend to be costly, usually charging around 1 percent of assets per year, regardless of whether the investments they manage gain or lose money. On an initial portfolio of $500,000, that would cost you almost $750,000 over a 30-year period, assuming average investment returns of 6 percent. Other advisers use a commission-based fee structure, lopping 3 to 6 percent off the top on any fund or annuity you buy.

Until recently, the only other option for fee-averse investors has been to manage their own accounts. Studies have shown, however, that such self-directed investors usually underperform the market—often by a lot—as a result of overtrading, panic-selling during downturns, and trying to time the market. A recent study by research firm Dalbar, for example, found that over a 30-year period, the Standard & Poor’s 500 Index had an annualized return of 10.35 percent, while the average self-directed equity mutual fund investor earned only 3.7 percent.

That created an opening for robo-­advisers to offer investors a solution that may be better and cheaper, by primarily using computer algorithms to select investments for you. They charge just a fraction of the cost of a human adviser—about 0.15 to 0.5 percent per year, depending on how much you invest. Most robos have little or no investment minimums, so you don’t have to be mega-rich to benefit from their advice. They recommend portfolios made up of low-cost index mutual funds that track the shares of an index like the S&P 500, and exchange-traded funds (ETFs), which are similar to index funds but trade more like a stock. Wealthfront, for example, charges just 0.25 percent per year for accounts over $10,000 (smaller accounts are free), with a $500 minimum investment. At Betterment, another big robo-adviser firm, the fees range from 0.15 to 0.35 percent, with no minimum at all.

In addition to those firms, asset management giants like Schwab and Vanguard have rushed to catch up to the competition by launching their own versions. Robo-­advice is even becoming specialized; in May, former Wall Street star and CEO of Citi Private Bank Sallie Krawcheck launched Ellevest, a robo-adviser that caters to women. It takes into account that because women live longer than men, they have a longer investing horizon and need a different asset allocation. “Robo-advisers are a phenomenon,” says Grant Easterbrook, who recently launched his own 401(k) advice firm. “Given the industry’s legacy of low transparency, expense, and conflicts of interest, this has been a long time coming,” he adds.

Certainly, robo-advisers are gathering assets fast. In just a few years, they’ve pulled in an estimated $53 billion, according to the Boston financial research firm Aite Group. Though that’s a small slice of the $20 trillion of retail investors’ total invested assets today, a recent report from Deloitte Consulting predicts that robos will be managing $5 trillion to $7 trillion within a decade. Moreover, though robos were initially aimed at tech-savvy millennials with small amounts to invest, they will probably take a substantial cut of the assets expected to flow from retiring baby boomers who are rolling employer-held 401(k) plans into self-managed IRAs. The services are already gaining traction with older investors: Betterment, for example, says that about a third of the assets it manages are from customers older than 50. “Robo-advisers are forcing human advisers to offer a better value proposition on top of what technology can already provide,” says financial planner and industry expert Michael Kitces, based in Columbia, Md.

Getting Started

Setting up a robo-portfolio is a simple process. Just answer a series of questions to determine your risk tolerance, financial goals, and time horizon, and the computer picks an asset allocation and investments for you (if you like, you can usually tweak the asset allocation). The whole process can take less than 15 minutes. On the websites, you can see exactly what you’re holding and how each investment is performing.

Most robos periodically rebalance your account to make sure your stock and bond allocation doesn’t stray from your model. Some even offer tax advice, letting you know when it might be smart—or not—to sell your stock holdings. And unlike brokerage firms, robos don’t profit from investor trades, so they encourage their customers to buy and hold, and avoid damaging their returns by overtrading. “Most brokerage firms want you to trade even if it means doing the wrong thing, because that’s how they make money,” says Jon Stein, CEO of Betterment. “Our interests are aligned with our customers.” Because robos typically recommend a portfolio made up of ETFs and index funds, your returns will closely match the performance of those funds, minus the robos’ small fee.

Going robo requires a fair amount of faith in the technology, however, especially when the market is rocky. After all, if the stock market hits a rough patch, you can’t always call your adviser for reassurance—nor will your robo-adviser call you, as a human adviser may, to offer assurances. Your robo may, however, send you a comforting email. According to some robo-firms, few customers pulled out or even changed their asset allocation during the tough period for the markets this past January. “We found that clients were more likely to call and check the website, but they stayed the course,” says Tobin McDaniel, president of Schwab Wealth Investment Advisory.

But human advisers argue that such a brief blip can’t be compared with a true bear market like the one that began in 2007, and robo-advisers weren’t around for that. “Many users of robo-services are young and invested aggressively. When you have a real bear market, those accounts are going to be hit the hardest and those investors are going to be the most skittish. That will be the real test for the robo-advisers,” says Darren Tedesco, a partner with Commonwealth Financial Network based in Waltham, Mass.

Moreover, there are some things that a computer-adviser simply can’t do. It can’t help you prioritize between several financial goals (say, paying down debt vs. saving), navigate a tricky financial situation like a divorce, or offer advice about how to save for college or handle your elderly parents’ financial woes. “The typical questions I get have nothing to do with asset allocation or investment projections,” says Boston-based financial planner Steve Stanganelli. “Of course, saving for retirement is important. But it’s only one of many pieces of a financial plan.” New York City retiree Dora Keller, 73, says that without her financial adviser, she might not even know how to formulate her questions. “The personal aspect is so important,” Keller says. “They’ve done this before, and they get what I mean right away. It’s a safe place to say things. To me, it really feels worth it.”

A human financial adviser can also give you a holistic, big-picture look at your total wealth, which is likely to include a 401(k) or other employer-held savings plan, or even a pension. Once all of those elements are considered together, notes Stanganelli, an investor’s ideal allocation might be different from the one the robo recommends. Some robo-advisers, however, will sync your 401(k) and other holdings with your robo account for a more holistic view.

In order to offer robo-investors a little more hand-holding, some firms have launched hybrid services that pair robo-advice with on-call human advisers. One such firm, Personal Capital, charges an annual fee of 0.49 to 0.89 percent of assets (depending on your account balance). Vanguard’s service, available for customers with account balances of $50,000 to $500,000, has an annual fee of 0.30 percent. Both firms allow you the option to contact a professional adviser.

“We think the true value of a program like this is when you have a life event like a marriage or job change, you have the ability to reach out and have a conversation about it,” says Frank Kolimago, head of Vanguard’s Personal Advisor Services. “That’s the best of both worlds,” he adds.

Still, even with a hybrid service, you won’t always get the benefit of a relationship with a single person who is deeply familiar with your situation and has followed your financial life over a long period of time.

Adding It Up

So would you be better off ditching your pricey human adviser for a cheaper computer solution? The answer depends on a variety of factors, including your financial circumstances, reaction to risk, and comfort level with recently developed technology. “It’s just a matter of what makes sense for you,” says adviser Kitces. So consider the four factors below to help you decide which option best suits your situation.

The size of your portfolio. If your total savings is less than six figures, it probably isn’t worth paying for a human adviser. Robos’ low minimums make them the appropriate option for investors with smaller portfolios, or for those who are just starting out, says Tricia Rothschild, head of Global Advisor Solutions at investment research firm Morningstar.

Your options for savings. If you or your spouse have access to a 401(k) or other tax-advantaged employer-sponsored savings plan, that is probably the best place for you to funnel some or all of your retirement savings contributions (especially if you qualify for a match). A human adviser can review your 401(k) and factor that in when recommending an overall allocation; many robos don’t take employer-based plans into account, so if that’s where you mainly save, you probably won’t get any advice in that area.

Your overall financial situation. Even human advisers agree that for setting up a basic, diversified portfolio, it’s tough to beat the low cost of a robo-adviser. But “there’s a natural evolution where life goes from being somewhat simple to more complicated,” says Elliot Weissbluth, head of Chicago-based financial services firm HighTower. If you’re trying to decide among several financial goals, or your financial plans involve one or several other people (such as a spouse or aging parents), you may need to talk to someone who can run the numbers on several different scenarios.

Your prior track record. Did you freak out during the bear market of 2008 and pull out of stocks? If so, keep in mind that it’s pretty easy to bail out of a robo-portfolio with just a few clicks. If you tend to get very anxious about market drops, you may benefit from the ability to reach a knowledgeable person who knows you on the phone. “An adviser serves as a coach, like having a trainer at the gym,” Rothschild says.

How a Robo's Brain Works

Entrusting your retirement savings to a computer may give even technophiles pause. But the investment strategies devised and managed by them are hardly something the computers came up with on their own. To suggest your investment strategy and then manage your money, robo-advisers use a human-created algorithm—a complex mathematical formula that considers three main elements: the historical long-term performance data of assets like stocks, bonds, and commodities; information you’ve provided about your investing goals, timeline, and how much money you have to invest; and a menu of low-cost investments, primarily index funds and ETFs.

With that data, the algorithm decides the best way to achieve your financial goals. It will suggest an appropriate proportion of stocks, bonds, and cash, then over time buy and sell specific investments to make sure your asset allocation goals are met.

Because the various robo-­adviser platforms draw on the same historical data and offer comparable ETFs and index funds, the portfolios they suggest for investors with similar profiles may differ little from one another. For example, no matter which robo-­adviser a young investor who doesn’t expect to retire for a number of decades uses, he will probably be recommended a portfolio that’s almost entirely invested in equities (or stocks). That’s because over the long-term, stocks have outperformed other investments such as bonds and commodities, offering someone with more than a few years to go until retirement time to absorb the higher risk and maximize gains.

Editor's Note: This article also appeared in the September 2016 issue of Consumer Reports magazine.