4 Myths About Robo Advisors That Are Hindering Your Investment Strategy

by Hank Coleman

Pros and Cons of Using Robo AdvisorsIf you currently rely solely on a self-managed investment account or a pricey investment broker to manage your money, there are several advantages to trying out a robo-advising investment platform that you might not have considered. Companies like Betterment and Wealthfront are increasingly popular for small and big time investors alike looking for robo advisors. Their algorithms are designed for optimal portfolio growth in a variety of market conditions and their fees are typically lower than what you might pay through a professional investment advisor.

Robo Advisor Myths Hurting Your Investments

Although robo advisors have become significantly more popular over the past few years, a lot of current and would-be investors are still wary of the idea of letting a robot or computer algorithm decide their investment allocations for them. Are these four myths about robo advisors hindering your investment strategy and return on investment?

Myth #1 – Your Money Isn’t Safe with Robo Advisors

Starting and managing your own investment accounts online might sound like a risky venture, but in reality, the major robo-advising companies are SEC-registered and regulated like other investment firms. Furthermore, if you invest with Betterment Securities, your assets up to $500,000 per account are protected through the Securities Investors Protection Corporation (SIPC) to ensure against any potential Betterment’s financial insolvency and/or missing funds from your accounts.

Data through online-based robo advisors is also protected in secure facilities, and there are multiple security features in place to protect your personal information and your funds through your online account.

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Myth #2 – An Experienced Professional is Better than an Algorithm

Did you know that robo-advising platforms oftentimes perform better over time than human advisor-managed portfolios? At the very least, existing research suggests that there is little to no correlation between professional advisors and better investment portfolio performances. Since nobody (or nothing) can truly predict the market’s ups and downs with consistent accuracy, there is no clear winner when it comes to optimizing clients’ investment portfolios.

However, as the Wall Street Journal points out, human advisors can be more prone to errors and require a financial incentive to work for their clients’ benefits, which is not an issue for an algorithm that has no cognitive biases or motivational needs.

Myth #3 – Robo Advisors Have Hidden Fees

Rather than charging high or hidden fees like some other investing platforms might, robo advisors often charge reasonable annual fees of 0.25% or even 0%, in the case of Wealthfront accounts with a balance between $500-$9,999. 

Betterment charges 0.25% on all deposits up to $2,000,000, which is quite low compared to a human advisor’s average 1-2% annual fee. Robo advisors are able to charge less because their overhead costs of doing business are lower than brick-and-mortar firms that hire human advisors, so don’t assume that lower fees equate to a lower quality of service when it comes to investment advising.

Myth #4 – Robo Advisors Are Only for Tech-Savvy Young People

While it may be true that younger generations like Millennials and Gen Z’ers are generally more tech-savvy than their Gen X and Baby Boomer peers, they don’t seem to be as adventurous when it comes to investing. As a recent survey found, just one-third of Millennials have money in the stock market, and Betterment reported that the average age of their customers is 35 (right in between Millennials and Gen X’ers).

No matter what your technological skill level may be, it likely won’t take more than 30-60 minutes to set up an account with a robo advisor online because the process is designed to make it easier for you to invest! There are hundreds of thousands of people using robo advisors nowadays, so don’t let investing intimidate you just because the platform is unlike other investment avenues you’ve pursued in the past. 

There are pros and cons to both human and robo advisors, but given the newness of robo-advising platforms, the myths and misgivings continue to persist and turn people away before they really understand what robo-advising is. Rather than shrugging off potential investment opportunities, research your options to decide which route might work best for you and your investment goals, and you might find that this relatively newer method of managing a portfolio is more flexible and lucrative than you previously thought.

Rather than shrugging off potential investment opportunities, research your options to decide which route might work best for you and your investment goals, and you might find that this relatively newer method of managing a portfolio is more flexible and lucrative than you previously thought.

Do you believe these four myths about robo advisors? Are they hindering your investment strategy and return on investment (ROI)? Have you heard others? 

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.

Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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