Automated services are gaining popularity, but can they handle the complex needs of investors in or near retirement? Thinkstock By Eleanor Laise, Senior Editor From Kiplinger's Retirement Report, July 2015 "Robo advisers" are making low-cost, computer-generated advice easily accessible to investors. But can automated advice address the complex needs of investors in or near retirement?See Also: SLIDE SHOW: 10 Best States for Retirement Traditional financial-services firms such as Charles Schwab and Vanguard Group, as well as newer players such as Wealthfront and Betterment, are competing to attract small investors wary of paying the 1% or more of assets that a typical human adviser charges. After assessing an investor's risk tolerance and goals through an online questionnaire, robo-advisers typically build each client a diversified portfolio of low-cost index funds, often for a fee of 0.25% or less. The services are proving popular among retirees and near-retirees. For example, about half of the clients of Schwab Intelligent Portfolios are baby boomers and older seniors, says Naureen Hassan, an executive vice-president at Schwab. Advertisement But older investors comparing robo-advisers with their human competitors will encounter some trade-offs. While some robo-advisers will help you manage existing investments, others will only build new portfolios from cash. Some services will help retirees develop a portfolio drawdown strategy, while others can't even handle IRA required minimum distributions. Given the availability of target-date funds and other do-it-yourself investment options, "the first question is not so much which robo-adviser to choose, but do I want a robo-adviser?" says FactSet director of exchange-traded fund research Elisabeth Kashner, who has studied robo-advisers' portfolio recommendations. Although robo-advisers and other automated investment tools offer some clear benefits, "it is important to understand their risks and limitations before using them," the Securities and Exchange Commission noted in an investor alert released in May. Robo portfolios. If you're thinking of working with a robo-adviser, consider how your overall portfolio might look after making the switch. Advertisement One key question: Will you have to sell off some of your current holdings in order to invest with the robo-adviser -- potentially incurring taxable capital gains in the process? Firms such as Wealthfront and Schwab are focused on building portfolios of ETFs, so people who don't have cash they want to invest would need to sell off other holdings. Firms such as FutureAdvisor and Vanguard, however, can help clients manage existing investments while also recommending mutual funds or ETFs to round out their portfolios. Also consider the range of investments that each firm will recommend. Vanguard Personal Advisor Services, for example, only recommends Vanguard funds. Many other robo-advisers recommend funds from multiple fund firms, but investors should review the investment mix. FutureAdvisor doesn't include any municipal bond funds -- an omission that may trouble investors in higher tax brackets. Fees. While all robo-advisers look cheap compared to the typical human adviser, some cost considerably more than others. On the cheaper end of the spectrum, Wealthfront customers pay no commissions, no advisory fee on the first $10,000 under management and 0.25% on amounts of more than $10,000. FutureAdvisor, however, charges 0.5% of assets, and investors must also pay some trading commissions. If no advisory fee is charged, find out how the firm is making money. At Schwab, for example, investors pay no advisory fees and no commissions. But the recommended portfolios include cash allocations of 6% to 30%. That cash is swept over to deposit accounts at Schwab Bank -- generating income for Schwab. Advertisement Although it's a good idea to maintain an emergency fund so you don't have to sell off investments if you suddenly need cash, the Schwab cash allocation doesn't fill this need. If an investor withdraws cash, the service automatically rebalances the portfolio to bring cash back to the targeted percentage. "We believe that cash is the best defensive asset class," Hassan says. Bells and whistles. Consider how a robo-adviser stacks up against a human adviser or a do-it-yourself approach in terms of tax efficiency, retirement drawdown advice and other ancillary benefits. Robo-advisers often trumpet tax-loss harvesting as a return-boosting benefit for customers. They will scan customers' portfolios daily, looking for investments to sell at a loss. The proceeds are reinvested in similar holdings, allowing the investor to maintain market exposure while generating losses that can offset taxable gains. But all that trading involves risks, including the risk of switching into a "second-best" ETF that doesn't provide the same market exposure or performance as the original holding, Kashner says. And tax-loss harvesting doesn't benefit everyone. People in the 15% bracket, for example, have a 0% tax rate on long-term capital gains. Retirees seeking drawdown advice will find big differences among robo-advisers. Vanguard's service offers a customized drawdown strategy for customers approaching retirement, and Betterment aims to help retirees maximize income while maintaining a fairly consistent level of spending from year to year. Advertisement FutureAdvisor, however, doesn't offer such services. Nor can it handle older investors in tax-deferred accounts, "because we're not yet prepared to help them with the mandatory withdrawals," says Chris Nicholson, the firm's head of communications. Security. Before handing any money to a robo-adviser, find out which firm will actually have custody of your assets and how long that firm has been in business. At FutureAdvisor, for example, client assets are held at Fidelity or TD Ameritrade. "They see everything we do," Nicholson says. "It's a built-in check and balance." Robo-advisers are largely untested in extremely volatile markets. "What happens if we go through another downturn?" asks Christopher Lengle, chief strategy officer at robo-adviser Invessence. Recognizing the role of human advisers in such situations, Invessence last year switched from providing robo-advice directly to investors to building automated investment management technology for financial advisers, Lengle says. Consider whether a robo-adviser offers easy access to a human adviser. Schwab clients can talk to human advisers by phone, e-mail or online chat, but they are not assigned a dedicated adviser. At Vanguard, customers investing $50,000 to $500,000 work with a team of advisers, while those investing $500,000 or more are given a dedicated adviser.