Have you been waiting to get started in investing because you think it’s confusing? Do you think that too much money is required to start, or financial advisors are too expensive? It doesn’t have to be that way. A new investment method called robo advisors has been changing the financial landscape recently. And, it’s something that you may want to consider.
What Is A Robo Advisor?
A robo advisor is an online wealth management service that provides automated, algorithm-based investment portfolio management advice without the use of human financial planners. Robo advisors use the same software as traditional advisors, but they usually only offer investment portfolio management. They do not get involved in more personal aspects of financial planning, such as taxes, retirement, or estate planning.
Now, you can get started with a robo advisor with as little as $1 in some cases. The fees are reasonable, and the robo advisor does the investment allocation for you.
So, you do not have to read a library full of investment how-to books before diving into the game. There are many robo advisors on the internet, and more are popping up everyday or so it seems.
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Here are some of the best and most popular robo advisors. Betterment, Wealthfront, Charles Schwab Intelligent Portfolios, and Future Advisor are some of the most popular robo advisors nowadays. They provide a wealth of information to their investors to help them every step of the way.
I personally have been using Betterment for a couple of years now. I love the ETFs that they offer their investors. It’s a simple way to “set it and forget it” with your investments. The robo advisor does all the work for you. Open a Betterment account now!
Of course, robo advisors aren’t perfect. So, if this way of investing is something you’ve been considering, then check out the pros and cons of robo advisors.
Pros and Cons of Using Robo Advisors
Pro: Robo Advisors are Excellent for Beginners
If you don’t know much about investing and do not have the time, interest, or energy to be constantly reading stock market news, then letting a robo advisor do all the work for you could be an excellent compromise.
Robo advisors operate with computer algorithms such as the Noble Prize-winning investment option from Betterment. These algorithms are designed to maximize the potential of your portfolio through blending different stock, bond, and mutual fund options based on your expressed needs, while minimizing losses during bear market times.
Another benefit for beginning investors is that robo advisors require little to no upfront investment. Whereas a traditional financial advisor may require several thousand dollars before taking you on as a client, robo advisors such as Betterment and Wealthfront require between $0-500 to get started with either a lifestyle investment account or an IRA.
Betterment does not have a minimum required for an initial deposit. Wealthfront requires investors to deposit $500 initially to open an account.
Cons: Less Personalized Service
If you prefer face-to-face interactions with people and want to rely on a trusted individual to manage your money, then online robo advisors may not suit your interpersonal needs.
After all, there are numerous benefits to using a human advisor, such as receiving personalized guidance during turbulent market times. With a human advisor, there’s also the benefit of being able to fully customize your portfolio rather than letting an electronic advisor pick.
You can choose investments that seem suitable for your lifestyle based on a short questionnaire you take when you’re first starting out with a robo-advising company. However, if personalization matters less than monetary results, then starting off with a robo advisor could be a reasonable choice, especially with the lower fee structure.
Pro: Lower Fees
InvestorJunkie’s comparison of robo advisors’ fee schedules can show you just how much you’ll be paying in fees for your investments with a non-human advisor. Management fees start as low as a flat rate of $10 per month or 0.15%-0.35% on the invested balance (the higher your balance, the lower percentage your fee will be). For example, Wealthfront averages a 0.25% fee for its investors.
Compare this to the average fees charged by human advisors, which Advisory HQ reports to be between 0.25% (for multi-million dollar investments) and 1.45% (for investments around the $50,000 mark). If you’re a small-time investor concentrating on building your wealth, then the fee scales really make a difference in your financial situation.
Con: No Return on Investment (ROI) Guarantees
This is true for both human advisors and robo advisors, but some people mistakenly believe that letting a strategic algorithm decide their investments is always superior to human advisors. The market will inevitably fluctuate however. Robo advisors are generally able to ride out these waves through adjustments to the algorithm, but the fact of the matter is you are never guaranteed profits regardless of who or what you invest with.
Pro: Tax-Loss Harvesting
According to Investopedia, tax-loss harvesting is “selling securities at a loss to offset a capital gains tax liability.” Many robo advisors incorporate this practice automatically for their investors, and Betterment says you can offset your tax burden by as much as $3,000 per year.
You can choose whether or not to engage in tax-loss harvesting through a robo advisor account and even if you choose to forgo this benefit, it’s still available in the future if you want to reduce your taxes one year.
Motif Investing’s Answer to Robo Advisors
Another option for investors is Motif Investing. Motif provides advisors and self-directed retail investors with simple, commission-free allocation models and rebalancing. There is also no added management fees, which runs counter to “robo advisors”, which can be accompanied by management fees ranging from 0.15%-0.35% of total assets per year.
Motif can be a great alternative for DIY investors that want to wrap an advisory fee around a free product. As you can see, there are plenty of reasons why you might want to try using a robo advisor before upgrading to a traditional financial advisor.
Robo advisors are efficient and affordable, and robo-advising can be a great learning experience for folks who are just starting out in the world of investing beyond bank accounts. Click here to learn more about Motif Investing
If you need more personalized options for your investments then robo advisors may not work for you. But, with so little money required upfront, it could be worth a shot.
Have you tried using a robo advisor? Which one? I’d love to hear your experiences.