Rise of the Robo Advisors
What Are Robo-Advisors?
How They Work
Many robo-advisors, like Betterment and Wealthfront, use algorithms (computer-based problem-solving processes) to determine your optimal investment strategy: First, you provide personal details about your age and risk tolerance. Then, based on your propensity toward (or against) risk, you are given a portfolio recommendation, like aggressive, conservative, or moderate, says Lorraine Fox, director of wealth management at Aspiriant.
From there, the program invests your money into funds that fit the profile it creates for you, reinvesting as needed. While programs like Betterment don’t require the user to have any investment knowledge (the algorithm tells you which strategy best suits your needs), you have the option to select how much you want to invest in stocks versus bonds. The main difference from traditional investing (with a human advisor) is that “the entire process is accomplished through a Web browser and without human intervention,” Fox explains.
What They Do
The sole function of robo-advisors is stock-market investment (typically in low-cost ETFs). “What robo-advisors realized is that not everyone needs all of the services a traditional wealth manager provides, particularly if they don’t have enough money in the bank to get fancy with,” says Kendrick Wakeman, CFA CEO of FinMason.
Traditional wealth managers handle estate planning, retirement planning, tax assistance, and a number of other services, giving more detailed and thorough attention to each client’s portfolio depending on her needs, while robo-advisors handle only investments. “It’s a lower level of service, for sure, but they do so at a lower cost, and are willing to take lower account minimums,” Wakeman says.
By building your portfolio automatically, these robo-advisors allowanyoneto invest, no matter how much money they have. For example, Betterment has no minimum deposit, nor does it have a minimum required balance to maintain an account.
“Robo-advisors are good for consumers as they are emphasizing low-fee exchange-traded funds (ETFs) over actively managed mutual funds,” says financial advisor Laurie Itkin, author ofEvery Woman Should Know Her Options. Which is why robo-advisors may be great for more passive investors (also known as buy-and-hold) — people who purchase investments with a plan to let them appreciate over the long-term with limited maintenance.
What They DON’T Do
While robo-advisors are certainly shaking up the financial industry, they aren’t a replacement for traditional wealth managers. “A traditional wealth manager takes into account your own unique needs and circumstances,” Wakeman says. “[He or she] will look at all aspects of your financial life: How much do you need to save for retirement, how much you can spend, and what your insurance needs are. [He or she will] answer basic estate and inheritance issues and random questions likeShould I put my house in my name, my husband’s name, or both?, as well as how you should invest your money.” All these elements are outside the scope of robo-advisors.
Additionally, robo-advising is not for anyone who wants more of a hands-on approach to investing. “If your preference is a more active portfolio strategy and if you are seeking to be an active partner who provides input about investments purchased and sold, a robo is not for you,” says financial advisor Richard Rosso.
How They're Changing the Industry
Traditional financial advisors usually have net-worth requirements — sometimes as high as million — which is far more than the average person has to invest.
By contrast, robo-advisors bring investment opportunities to the masses. Because the process is fully automated, the cost of adding a new client is very small — and these savings are passed on to the consumer. “Traditional wealth managers have historically tried to beat the market for their clients,” explains Alan Moore, co-founder of the XY Planning Network. “For that service, they have charged 1 to 2 percent, along with using mutual funds charging 1.2 percent on average. The typical robo-advisor charges .25 percent — 1/4 of 1 percent — with extremely minimal fund cost.”
Therefore, robo-advisors allow for a whole new class of investors, albeit less investment-savvy ones. “For most people, making an investment decision is a large expenditure, it could be highly impactful on their lives, they don’t know all that much about it, and there is a general expectation that they are going to be taken advantage of [by a human advisor],” Wakeman says. “To the extent that robo-advisors are able to get people to pay attention, then they are doing everyone a great service.”
Why They're Popular
Robo-advisors not only make investing more accessible, they also take the pressure off. You don’t have to be a shrewd investor, since the programs do much of the work for you (research, strategy) — but you still maintain control.
“Being in control of the process can be a great anxiety reliever for many people,” Wakeman says. “People tend to avoid situations that make them anxious, and ignoring your investments is a dangerous business.”
Millennials in particular might appreciate this technology, since so much of their decision making is made at computers and smartphones. “If the user feels at all uncomfortable [during the initial setup process], she can simply put the process on hold, Google her questions, check with friends, even look at what other robo-advisors might be saying … all without leaving her chair and completely on her own terms,” Wakeman adds.
Why They Can Be Risky
Used as part of a larger financial plan, robo-advisors can be a helpful tool. However, you shouldn’t view them as a complete financial management solution.
“People should not believe they are getting personalized wealth management when they are simply getting good, solid portfolio management,” says Colin Drake, founder of Drake Wealth Management. “Portfolio management is a subset of the services of overall wealth management.”
These online tools also can’t account for unexpected life events that affect your portfolio and investment strategies. “Individuals using a robo-advisor have the burden to proactively change their portfolio allocation should the individual lose her job, get married, get divorced, lose a spouse, or have children,” Itkin says. “When working with a human financial advisor, the burden is on the advisor to check in and monitor life-changing events and make appropriate changes.”
Which Ones to Check Out
Three of the most popular robo-advising platforms right now are Betterment (which holds your portfolio for you), Wealthfront (which manages your portfolio but doesn’t hold it), and Motif (which is a more active investment platform). Acorns is another popular platform (as an app; it’s mobile only) and offers portfolio management, automatic rebalancing, and dividend reinvestment with low fees.
“While there are some differences in fee structure and service among the robo-advisors, they have a lot of transparency around what they do and don’t offer and how much they charge, so investors can make informed decisions on that basis,” Wakeman says.
He also notes that RIA (Registered Investment Advisor) platforms like Fidelity, TD Ameritrade, and Charles Schwab are now adding robo-advisors to their lineups, and some robo-advisors offer premium amenities, like letting you talk to a live advisor (like Personal Capital) — creating hybrid services for people who are comfortable investing through an algorithm-based program but who also want that human connection.
Maybe They Can
Robo-advisors: They sound like something out of a sci-fi movie, but really they’re the latest — techiest — trend in investing. And they’re seriously shaking up the financial industry.
For those unaware, a robo-advisor is a digital platform that automates the investing process (such as choosing funds and rebalancing), streamlining part of the work that a traditional financial advisor would do. And even though computers automate the investment process, they also allow the user complete control over those investments — without requiring the user to be investment savvy.
“No normal human should be responsible for annual portfolio rebalancing in today’s world,” says DailyWorth CEO Amanda Steinberg. In a time when so much of our lives is already automated, “Shouldn’t computers do this stuff for you?”
Is the robo route right for you? Here’s what you need to know about this growing technology.
Video: Are robo-advisors a good idea for investing?
Can You Use Essential Oils To Get Rid Of Cold Sores
Hair color ideas for long hair – Latest top best hair colors in 2019
Performance Enhancing Drugs in Sports
How to Know Who You Are
16 Latest Haircuts For Men 2019 Upcoming Popular Styles
Why Chrissy Teigen Wants Daughter Luna To Eat Fast Food
WOMEN ARE BIGGEST WEB USERS
This East London pop up will create your own sustainable lipstick in just 15 minutes