They are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. They collect information from clients about their financial situation and future goals through an online survey, and then use the data to offer advice and automatically invest client assets.
Nowadays most robo advisors use passive indexing strategies optimized using a variant of modern portfolio theory (MPT). Other robo advisors offer optimized portfolios for socially responsible investing (SRI), Hallal investing, etc.
Most robo advisors charge an annual flat fee of 0.2-0.5% of a client's total account balance, much less than the 1-2% charged by a human financial planner.
The primary way is through a wrap fee based on assets under management (AUM). Another way is through interest earned on cash balances.
Another is payment for order flow. Typically, robo-advisors will accumulate funds that have been added from deposits, interest, and dividends and then bundle these together into large block orders executed at just one or two points in a day. This allows them to execute less trades and get favorable terms due to the large order sizes. Many times, these blocks will be directed to particular liquidity providers such as high-frequency trading shops or hedge funds in return for rebates which are paid to the robo-advisor.
Finally, robo-advisors can earn money by marketing targeted financial products and services to its customers such as mortgages, credit cards, or insurance policies. These are often done through strategic partnerships rather than the use of advertising networks.
Robo advisors aren't sufficient for those needing advanced services like estate planning, complicated tax management, trust fund administration, and retirement planning.
Automated services are also ill-equipped to deal with unexpected crises or extraordinary situations, like inheritances.
Furthermore, robo-advisors operate on the assumption that clients have defined goals and a clear understanding of their financial circumstances, to begin with. For many, that is not the case. Many people don't know how much risk they're willing to accept.