The following is a guest post by Manna Chikwe. Manna is a b2b content writer, copywriter and ghostblogger. 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 don’t 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 don’t 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, it’s 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 don’t 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 don’t have an internet connection.
Also, the software provides you with all your transactions accurately down to the smallest detail anytime you want it. They don’t overlook certain information or inadvertently give you incorrect information.
It’s 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 don’t 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 don’t get too exposed to certain markets or anything goes wrong. With robo advisors, there’s 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 don’t 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 ETF’s. 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.
The following is a guest post by Bella Wanana. Bella is a dreamer and writer who is passionate about personal finance. You can follow her here to be a witness of her eclectic life. Enjoy!
Employers, employers, employers. They are what most of us depend on for a livelihood, and they are the places where we spend more than 40% of our waking lives in. These companies, ranging from a small 10-people startup to a multi-million-employee conglomerate, are non-living entities that collectively breathe and produce and impact every single aspect of our lives.
Of course, as entities powered by human beings, employers cannot neglect to take care of the very source of their energy – the employees themselves. Your employer may offer benefits that you, a regular employee, can take advantage of to help with your savings and life goals. Below are a few common tips and tricks that I have used in my personal life.
Take advantage of your company’s employee matching program for retirement funds
Although in the last few years, more and more employers have switched from defined benefit retirement plans (DB), which provides a stable source of income to their employees upon retirement, to defined contribution retirement plans (DC), which only guarantee the amount contributed but not the returns, most companies still match a certain percentage of your contribution to the company-sponsored retirement fund. The exact percentage differs by employer, but, regardless of the number, make sure that you contribute as much as you can, ideally the full amount. Granted that there may be cases, such as having to cover for an emergency medical bill, or you are focusing on building your emergency fund, that you prefer to have access to the money that would otherwise go towards your retirement income, you should switch back as soon as you reach these short-term goals. While it is true that there are restrictions for accessing the funds – typically you can’t access the funds till you are at least 55 or 60, but this is 100% guaranteed return at a rate of 50% (if you contribute $1 and the employer contributes 50 cents), or more. Not even Warren Buffet, who is believed to be the best investor in the world, could claim to consistently succeed at this rate.
Take advantage of automatic deductions with your pay checks
Many employers take automatic deductions, most commonly for your income taxes and company-sponsored insurance premiums, directly from your pay checks. Additionally, if you elect to participate in the company-sponsored retirement program (which you really should as I mentioned above), your contribution to the fund is also automatically deducted from your pay checks. But you can go one step further: employers could also automatically deduct from your pay checks your contributions to your own savings accounts, such as your 401(k)/Registered Retirement Savings Plan (RRSP). Although your company most likely won’t provide the same matching benefit on your individual accounts, this technique can help you save money, because you won’t even be able to see the money showing up in your bank account to begin with. You will be much less likely to suffer from separation anxiety from your money, will get accustomed to a lifestyle using only the money you have access to, and the money locked away will grow to become a nice nest egg for you to enjoy down the road.
One important thing to note is that before you set up the automatic transfer to your 401(k)/RRSP, you should do some calculation to make sure that you won’t be at the risk of over-contributing over the full year. This is especially true if you have switched jobs mid-year, or have multiple jobs, or have 401(k)/RRSP accounts with multiple financial institutions, as it may be challenging for an outsider other than you to keep track of everything for you.
Maximize usage of your employer’s insurance benefits
First and foremost, celebrate the fact that your employer actually offers insurance benefits for you! After that, please make sure that you familiarize yourself with all the benefits that your company offers. I know that reading the pamphlets can be a really pain sometimes, but there could be many hidden gems in them. Oftentimes, in addition to the standard drugs and dental benefits, your employer can also offer benefits on, for example, registered massage therapy. Instead of going to an expensive restaurant for a fancy dinner, why not use some of your insurance benefits for a deep tissue massage (please make the point to call ahead and confirm that it will be reimbursable) at a nice spa? That’s a nice way for some self-pampering for sure. You can even team up with your significant other and enjoy a couple’s massage – that’d be a nice date night without having to shoulder 100% of the cost yourselves.
If you are fortunately healthy enough to not need all the services provided in your insurance benefits, and you are not interested in paramedical services even for relaxation purposes, you could potentially redirect a portion of the benefits towards a taxable health spending account. Depending on your company’s policy, this account may be used for general health-oriented activities, such as fitness classes, gym memberships, or even golf memberships. Note that these count as taxable benefits so you’d still have to pay income tax (let’s say 30%), but for the fitness enthusiasts out there, who doesn’t want to join a fitness class at a steep 70% discount?
Take advantage of your company’s perk book
In addition to the relatively standard benefits such as retirement matching and supplemental health and dental insurance, many companies also offer additional discounts in partnership with external organizations. Your company can usually negotiate a much better deal with the external partners than what you can do by yourself, simply because your company represents a much bigger pool of potential clients. You could get discounts on auto insurance, mortgages, shows, or even concerts. My company even offers discounts for fresh flowers, which was a very pleasant surprise when I was researching for gifts for Mother’s Day! Make sure you familiarize yourself with these unique discounts your company offers, and take advantage of them whenever possible.
Make sure that you reimburse all your business expenses
Spending money on behalf of your company could be a pretty regular part of your day-to-day, depending on your position. Most likely, your employer will require you to use a corporate credit card for company’s expenses, but sometimes, you may have to use your personal ones. Regardless of the cards you use, make sure that you spend within your company’s policies, collect all the receipts, and submit the reimbursement requests before the deadline you company outlines. These are expenses that should not come out of your pockets, so don’t let them!
When you submit your receipts, the company will generally require that you provide at least some description. One good strategy I find useful is to make a quick note on your receipts as soon as you get them. When I first started working, I made the mistake of throwing all receipts into one drawer and only clearing them out all at once at the end of the month. But by the end of the month, I had already forgotten exactly why I spent the money, so it was a huge hassle going back to hundreds of emails to try to sort them out. Don’t be like the inexperienced me, and take a quick note while your memory is still fresh.
I hope the tips above are helpful for you. Let’s take advantage of the perks employers provide to enhance our own lives.
