If you were offered one, you probably wouldn’t turn down a robot housekeeper. Or a robot driver. Maybe you’d even accept a robot landscaper. But who would ever accept a robot investment advisor to take charge of their investment, retirement or savings accounts? Turns out, lots of people!
Robo-Advisors: What They Are
Robo-advisors are programmed algorithms that serve as automated investing tools for savers and investors. Robo-advisors are gaining in popularity and more and more traditional firms are integrating them as part of their overall investment management options. When you work with a firm that offers a robo-advisory service, you fill out a questionnaire that outlines your goals, risk tolerance and timeline and the robo-advisor picks investments for you. Most of these services rebalance portfolios automatically and can offer some pretty advanced services, such as strategic loss harvesting, tax-efficient allocation and gain deferrals. One robo-advising company we’ve come across and hear of often is Betterment, which offers a convenient and technology-based way to invest for those who aren’t completely savvy.
The Benefits and Drawbacks of a Robo-Advisor
For savers with small balances, robo-advisors offer the opportunity to get some pretty sophisticated guidance at a relatively low price. It’s the kind of personalized service that many savers won’t get from a human advisor because their balance is too low. Robo-advisors also help average savers enjoy the benefit of much more oversight and strategy than they would otherwise get. This makes robo-advisors a great service to consider when you’re first entering the world of saving and investing.
Robo-advisors may not be a good fit for every investor, however. Some investors benefit more from the person-to-person contact of a human advisor to help explain market movements, discuss various investment options, and adjust to changing goals and timelines. A robo-advisor lacks the ability to understand and combat human fear and irrationality, something that can easily take over when an investor sees the value of his or her portfolio dropping.
There’s no question that, unless you are extremely knowledgeable about investing and have a lot of time to spend researching, robo-advisors offer distinct advantages over self-directed investment planning. These sophisticated algorithms are better able to keep up with tax changes and react to market downturns in a much quicker and more rational way than many self-directed investors. But if you crave the input, emotional management, and personal relationship aspect of a human advisor, you may find robo-advisors lacking.
Robo advisors are bringing down costs and introducing some amazing new tools that will change the way we invest moving forward!