The following is a guest post by Manna Chikwe. Manna is a b2b content writer, copywriter and ghostblogger.ย Enjoy!
I heard about robo advisors in 2016 and it was my first time hearing it alongside about 70 people in a business forum. It was pretty much a new term for all of us present. But robo advisors have been in the investment world since 2006, though enhanced versions were introduced in 2008 after the financial crisis. It has since then been popular among investors looking for easier ways to manage their portfolio.
In simple terms, a robo-advisor is a digital platform that offers automated investment services based on algorithms. It collects data from you about your monetary situation and investment goals through an online questionnaire. It then makes use of these statistics to decide which type of portfolio and asset allocation is best for you.
Robo advisors today use passive investment strategies based on Modern Portfolio Theory and the Efficient Market Hypothesis. They create an income investing portfolio that is right for you based on your risk tolerance. With robo advisors, you donโt have to bother about how frequently you should rebalance your portfolio as it automates this process. It also takes care of your tax-loss harvesting, stock level tax harvesting, risk parity and your retirement plans.
These software platforms are revolutionizing the way investments are carried on today. Before you make the decision of using a robo advisor, there are important pros and cons you should know.
PROS OF ROBO ADVISORS
Low investment requirements
Many people still think that investing must be with huge chunks of cash. However, with robo advisors, you no longer need a lot of money to begin investing. You can get started with little amount depending on the particular robo advisor you intend to use.
Some robo advisors like You Invest by J.P Morgan let you start investing with as little as $1 while Bettermont, one of the highly-rated robo advisors allows a 0$ minimum requirement. Meanwhile, on average, a traditional advisor will require you have up to $5000 minimum to begin investing. This makes using a robo advisor entirely good news especially when you are starting out with little networth.
Little experience required
You donโt need to be an expert investor to get started with a robo advisor. These platforms typically save you the stress of bothering about value investing, Phil Town Rule #1 system, or any other investment strategy out there. All you need is the readiness to invest and the ability to fill out a questionnaire online.
Yeah, itโs that simple.
Then all you have to do is sit back and watch the software automatically choose an investment project for you and manage it efficiently. It also constantly tracks your investments to rebalance them with your target allocation. Rob advisors also educate you on how to make the best decisions for your investment goals.
Low fees
One of the big benefits of robo advisors is their fees are lower than what you will be paying a human financial advisor. Robo advisors make investment more affordable. The fees charged by robo advisors are lower because they usually invest in index funds and ETFs. Most robo advisors charge around 0.25% to 0.50% of your assets under management. Some robo advisor software like Ally and M1 charge completely nothing to manage small portfolios. Human financial advisors on the other hand charge an average of 1% – 2% for ongoing portfolio management or a flat fee of $1,500 – $2,500.
Logical thinking
Robo advisors use logical analytical research based on powerful algorithms to organize investment processes. They are an algorithm-based software and unlike human advisors; they donโt make investment mistakes because they freaked out at the fall in prices or simply investing from a hunch.
Robo advisors manage your portfolio based on logical deciphering of macroeconomic factors, company performance data and financial news.
Easy Accessibility
With a robo advisor, you no longer need to schedule meetings with your financial advisor or spend plenty of time waiting to fill out paperwork. Your investment software is always available to you on our device to do all of these unless you donโt have an internet connection.
Also, the software provides you with all your transactions accurately down to the smallest detail anytime you want it. They donโt overlook certain information or inadvertently give you incorrect information.
Itโs not only about robots
You may not be too comfortable with the thought of having all your investment being organized by software. I mean, not all of us have that total confidence in computers. But you donโt have to worry. A robo advisor is not just all about a tech tool handling your money.
They work with human professionals to provide investment services. Think of it from the common-sense perspective. Definitely there must be bunch of professionals over large screens monitoring investments to ensure that they donโt get too exposed to certain markets or anything goes wrong. With robo advisors, thereโs more than just supervising through large screens.
Most robo advisors offer human access. In fact, some of the key advisory firms have teamed up with robo advisors to give professional advice to users. Robo advisor software like Betterment and LearnVest have Fidelity Investments professionals offer advice on their platform. These experts answer your questions regarding understanding your portfolio, making investments, and achieving your financial goals.
CONS OF ROBO ADVISOR
Low human interaction
Inasmuch as robo advisors simplify the investment process, some people actually prefer total human oversight and interaction on their investment. Having a human expert oversee your investment still have huge benefits especially for big investments. There are also the possibilities of money related problems that only an inclusive human interaction could solve.
No Financial Planning Services
Robo advisors generally manage your investment but donโt provide financial planning except for very few of them like LearnVest. So in most cases, you will need a traditional advisor to guide you on best practices for your investment, especially for long term purposes.
Limited investment portfolio
If your target is to have a broader portfolio, then a robo advisor may not be right for you. They usually invest in mutual funds and ETFโs. Another downfall is that you cannot even choose the mutual funds or ETFs to invest in. Also, purchasing individual stocks or bonds are out of the option for you. However, indexing strategy has been proven to be better way to invest than picking stocks.
No best for long term goals
Robo advisors are best for short term investing and may not serve your long term goals. Mostly, the investment software structures your asset allocation in line with goals achievable within a short period of time.
If your goals stretch over a long period of time, it will be better to involve a traditional advisor to help you with the best investing strategies.
ARE ROBO ADVISORS BEST FOR INVESTMENT MANAGEMENT?
While the decision depends on your objectives, robo advisors are however indeed a great investment option. They offer numerous benefits as these software platforms keep integrating features that meet the needs of investors.
The human interaction and assistance which most of them offer is a great way of getting the most of both man and machine in investment. To choose a robo advisor, the most important thing to know is to make a choice that suits your financial goals so as to maximize your benefits from your investments.
