What is a robo-advisor?

Robo-advisors work with a web questionnaire and an algorithm. BaFin describes the process: the client answers questions on the amount to invest, knowledge and experience and appetite for risk. An algorithm turns the answers into an investment strategy or a model portfolio. The strategy usually relies on ETFs.

In automated portfolio management, a manager then runs the portfolio on an ongoing basis within the agreed guidelines. Rebalancing proposals also come from the algorithm, though BaFin notes that they have so far mostly been carried out by hand. Fees are usually a percentage of the portfolio value, often with a performance component. The term has two meanings in law: a one-off recommendation, or the ongoing management of a portfolio. Which one is meant depends on the contract.

Robo advisory is investment advice or portfolio management in the sense of MiFID II, so the full suitability rules apply. Article 25(2) requires the firm to obtain information on the client's knowledge and experience, financial situation and investment objectives. The robo advising definition in the ESMA guidelines of September 23, 2022 covers systems that deliver these services "in whole or in part" through automation.

In Europe, ESMA asks for more than the general rules. Firms that offer robo advisory services should give "a very clear explanation of the exact degree and extent of human involvement and if and how the client can ask for human interaction" (paragraph 17). They should also explain that the client's answers directly shape the suitability of the result. Paragraph 52 warns that clients may overestimate their knowledge when they answer through an automated system. Under paragraph 108, staff who define the tools must understand the algorithms and be able to review the advice they generate.

The difference lies in how the client is served, while the legal duties stay the same. A robo-advisor collects the client's answers through a screen; a human financial advisor collects them in a conversation. Both must run the MiFID II suitability test.

BaFin lists the pros and cons for consumers. Automated tools can lower costs and document the whole process. Clients may find it harder to raise questions when they misunderstand something, and it often remains unclear why the tool recommends a given product. Provider interests can shape seemingly neutral advice. BaFin also warns that easy handling can lead to careless answers, which then feed straight into the recommendation. Unlike a human advisor, the tool applies its rules to whatever the client enters.

A robo-advisor is a service, and an ETF is a fund product that the service often buys. The client owns the ETF units in a securities account at a custodian bank. According to BaFin, the portfolio manager receives a power of attorney to trade in that account, but no right to take ownership or possession of the client's money or securities.

Choosing between a robo-advisor and buying ETFs directly is a choice between two ways of holding the same kind of product: with a manager who selects and rebalances the funds, or without one. In finance terms, the robo-advisor definition always refers to the service, never to the fund.

In Germany, BaFin, which has offices in Bonn and Frankfurt am Main, supervises robo-advisors that are banks or financial services institutions, and the chambers of commerce (IHK) supervise those that work as financial investment intermediaries. Automated portfolio management needs a BaFin license under § 32(1) KWG or § 15(1) WpIG. Automated investment advice is a licensed service under § 1(1a) sentence 2 no. 1a KWG and § 2(2) sentence 1 no. 4 WpIG. A robo advisor in Germany therefore needs the license that fits its service. Robo-advisors usually buy fund units, and German households acquired a net EUR 27 billion of investment fund shares in the first quarter of 2026, according to the Deutsche Bundesbank in Frankfurt (July 16, 2026).

In Austria, § 3(2) WAG 2018 requires a license from the FMA for investment advice and for portfolio management. Switzerland is outside the EU, so MiFID II and the ESMA guidelines do not apply there. Article 12 of the Financial Services Act (FinSA), in force since January 1, 2020, requires a suitability check for portfolio-related advice and portfolio management, and portfolio managers need a FINMA license. This page gives no legal advice.