WHAT IS A ROBO-ADVISOR, AND DO YOU NEED ONE?
The idea of a robot that does things like clean the house, take out the trash, or walk the dog, are all interes6ng and appealing. What Robo-advisors offers is a service that offers value by giving you an easy way to invest your money.
Most of them help you work toward your financial goals by providing investment opportuni6es with affordable or no set account minimums.
You might be wondering, just how does it all work?
after all, it is a robot we are talking about. They can be incredibly impressive or laughably incompetent. Let’s find out where the Robo-advisors fall.
To invest you must be
at least 18 years old. Minimum
required capital 250 €
HOW DO ROBO-ADVISORS WORK?
Robo advisors are essentially automated investing services or online advisors.
They are powered by complex computer algorithms and software designed to take what
resources you have and build an investment portfolio from the ground up.
The services include things like automatic rebalancing and tax optimization. Most of the time,
the systems do not require human intervention to perform their tasks
Traditional portfolio management is different. It is not as accessible because the money managers require high balances to consider one as a client.
The Robo-advisors are not as labor-intensive and, as such, can take on more clients with no worries about volume.
That is also the reason why they can accept accounts with low balances.
The en6re process, from signing up for the service to getting your money invested into something with great returns, takes minutes.
The only thing you need to keep in mind is that choosing the right Robo-advisor is not that easy, and you will need to have a good understanding of the options you have so you can choose the one that is right for you.
ARE ROBO-ADVISORS EXPENSIVE?
Robo-advisors are cheaper than human financial advisors— most of the companies offering the service charge 0.25 to 0.50% for the annual management fee.
In some instances, there are free services you can use as well.
Financial advisors typically make money from a percentage of the assets you place under their care. If you have an account balance of, say, $1,000, you could be paying as little as $2.5 per year.
The annual fee is deducted from your account, prorates, and charged quarterly or monthly if you opt for traditional financial advisors.
With a Robo-advisor, you will not have to pay transaction fees.
Using a standard brokerage account, you could be required to pay a commission to buy or sell investments while rebalancing your portfolio and when you make deposits or withdrawals. However, with a Robo-advisor, these charges are waived frequently.
SHOULD YOU CONSULT A ROBO-ADVISOR?
There are several things to consider when you want to know if a Robo-advisor is right for you. Some of them are:
1. ACCOUNT TYPE
Robo-advisors manage accounts of all types. You can get an individual re6rement account or taxable account. Some of the Robo-advisors also manage trusts and, in a few cases, can manage
your 401(k.)
2. MINIMUM REQUIREMENTS TO INVEST
Most of the 6me, you will need to have an account minimum of about $500. Some of them require $5,000 before you can open an account. However, when compared to traditional financial advisors, you will find that the minimums are much lower.
3. PORTFOLIO RECOMMENDATION
The preliminary stage of inves6ng with a Robo-advisor involves a questionnaire. Included in the questionnaires are questions to determine your risk tolerance, investment preferences, and goals.
Robo-advisors usually give their potential clients anywhere between 5 and 10 portfolio choices. They are rated from the most conservative to the most aggressive. The algorithms running the Robo-advisor services recommend the best portfolio for you, based on the answers you provide to the questions.
However, the recommendations are not set in stone. You can override a recommenda6on if you feel like it is not right for you and then pick a portfolio that works.
4. SELECTING AN INVESTMENT
Robo-advisors build their portfolios out of ETFs (Exchange-Traded Funds) and Index Funds. They are investments designed to reflect the behavior of indices like the S&P 500.
The way this works will require you to pay some of the fees charged by the funds, called expense ratios. Those fees will be in tandem with the Robo-advisor’s management fee.
COMMON ROBO-ADVISOR SERVICES
For many of the advisors, the main aim is to automate investment management so computers can do it for lower costs. Most of the automated services you will get from the Robo-advisors include:
- Rebalancing the portfolio is done regularly. The whole process is either automatically done or set to be done at intervals. Most advisors use a computer algorithm to rebalance portfolios, so it does not stray too far from the original allocation.
- A variety of financial planning tools like retirement calculators.
- Taxable accounts will get tax-loss harvesting and tax-strategy offerings.
However, even with all these, it might be hard to feel comfortable leaving your investments in the hands of computers. If that is how you feel, consider online planning services.
WHAT ARE ONLINE PLANNING SERVICES?
They are companies that operate on a hybrid model combining traditional advisors and Robo advisors. You will get unlimited access to a team of planners or a dedicated financial advisor. You will meet them over the phone or through video.
The money you invest will then have human oversight and intervention at a much lower cost than traditional financial advisors
The cost of the services and the minimum investment requirements will increase due to human involvement, but it will be worth it if you pick the right service.
WHAT NOW?
Now, you need reviews of the companies offering these services. They will guide you through what the users think of the services and let you know what to expect. That is how you know if they have what you need and gauge if they are right for you.
At the end of it all, what you want is for your money to be safe and in good hands. In a world where investments tend to be a hit or miss, it would be prudent to leverage AI and the many algorithms that look at the markets to let you know where you can put your money for great returns without requiring any work from you.
ABOUT THE AUTHOR: ARIELLE O’SHEA
Arielle is a retirement and investing authority at NerdWallet. She has made appearances on the “ABC World News Tonight” show, “Today” and “NBC Nightly News”, and has been quoted by national publications such as Washington Post, The New York Times, and Bloomberg News. Arielle has 10 years’ experience covering personal finance, and was a senior write at NerdWallet before being promoted to an editor post. Before, she worked for personal finance journalist Jean Chatzky.
