A Guide To Robo-Advisors
Andrew Dehan4-minute read
December 11, 2020
Over the course of the past decade, we have watched as AI (artificial intelligence) technology has found its way into nearly every facet of our everyday lives. For some of us, one of the most helpful AI integrations has been in the financial space.
Robo-advisors are digital platforms that help manage financial portfolios for investors. Whether you’re looking to start investing and don’t know where to begin, or want help rebalancing a diverse portfolio, robo-advisors may be the automated technology you need.
What Is A Robo-Advisor?
Robo-advisors are automated financial management platforms that use algorithms to build investment portfolios, needing little or no human oversight.
These platforms are online-based and allow users to open a new account, access their funds and make changes to their portfolio day or night. Many robo-advisor platforms are available both on the web and from mobile devices and are typically very user-friendly.
With a robo-advisor, you can take a “set it and forget it” approach to many of your investment strategies – something that was previously only available to investors who hired human investment advisors. Whether you’re hoping to grow your existing portfolio or start saving for the first time, these automated platforms can not only offer guidance and recommendations, but also perform most functions on your behalf and educate you along the way.
How Do Robo-Advisors Work?
Typically, robo-advisors are only designed to help with retirement planning and portfolio management. Depending on the platform you choose, this may include your 401(k), IRAs, trusts and custodial accounts.
Not all account types are supported by each robo-advisor, though, so be sure that the platform you choose can best meet your individual needs.
There are many features offered by robo-advisors today, which can allow even the most novice investor to take the reins with their portfolio. For instance, they can help you calculate how much you need to invest each month and then set up automatic contributions so that you never forget to save. You can also automate dividend reinvestment so your money continues to grow.
Your robo-advisor can help you determine your investment risk tolerance and then build a portfolio strategy to match. As time goes on, the platform will help you to balance and rebalance those investments so that they align with your future goals.
You’ll also find that some robo-advisors offer services like tax-loss harvesting, which can help you optimize your investments to account for losses throughout the year.
One of the best things about robo investing is probably the cost. While traditional financial advisors may charge up to 2% of your AUM (assets under management), robo-advisors can do most of the same things for a fraction of that.
Of the robo-advisor platforms that charge a fee, most fall somewhere between .25% to .50% AUM. Some platforms are fee-free entirely, giving investors a guided way to take over their portfolios without charging a cent.
Advantages Of A Robo-Advisor
There are many benefits to opting for a robo-advisor when it comes to managing your investment portfolio. Let’s explore a few of them.
Lower cost. As mentioned above, some robo-advisors are entirely free to use (or free up to a certain account balance). Others may charge 25-50 basis points (or .25-.50%) of your account balance annually for use of the platform. This is significantly less than the ~1-2% charged by most investment advisors.
Low minimum investment requirement. In addition to cost, one of the biggest impediments to using a human advisor is the investment requirement. You’re typically required to have a certain amount in investable assets before advisors and firms will work with you, which can be hundreds of thousands of dollars in some cases. With robo-advisors, though, you’ll often find there’s no minimum investment requirement. Of the platforms that do have one, it’s usually somewhere between $500 to $5,000.
Accessibility. With 24/7 access to your account via web platform or mobile app, robo investing makes it easy to manage your portfolio. You can quickly log in to see where you stand and make changes to your account(s), day or night and from anywhere.
Education. Want to learn more about why your robo-advisor recommends a certain strategy or risk tolerance? Or, are you curious to see how far your projected savings will get you in retirement? Many robo-advisors offer online educational resources to users, allowing you to browse a wealth of information on all things finance.
Hands-off approach. You don’t need to worry about initiating monthly transfers, studying up on specific funds or learning how to rebalance a portfolio over time. The right robo-advisor can do all of this for you automatically.
Disadvantages Of A Robo-Advisor
There are a few downsides to working with a robo platform that you’ll want to keep in mind.
Not personalized. Yes, your robo-advisor will help you determine the risk tolerance and investment strategy that best suits you based on your personal preferences. However, this strategy will be calculated according to predetermined computer algorithms, nothuman touch. Even if these recommendations are a great fit for you, they aren’t as personalized as what you’d get from a live financial advisor.
Investments are limited. Robo-advisor platforms do not typically support all investment account types. You may be limited in your choices if you’re looking to include joint accounts, custodial accounts and the like.
Few options for expert advice. Some companies allow investors the option to speak with a financial expert if they have questions or just want a more personalized analysis. While this may give users added peace of mind, only a few robo-advisor platforms will offer such an option.
Is Robo-Investing For You?
Managing investments can be tricky, especially if you’re new to the process or aren’t sure if you’re on track to meet your retirement goals.
A good robo-advisor platform can help, though. They offer an easy way for you to take charge of your portfolio, even allowing you to automate the entire process.
Not only is robo investing easy, though, it’s also a more affordable way to manage your savings. Plus, with intuitive web platforms and mobile apps, you can manage your finances anytime, from anywhere.
Using a robo-advisor isn’t for everyone, especially those who prefer a human hand in their portfolio or have complex investment situations. For the average investor, though, they can be a great tool while working toward financial success.
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