Investing in the stock market can be a time-consuming affair, especially for people who don’t have investing knowledge. The thought of picking stocks, monitoring the market, or tracking bond rates can deter individuals from getting started with investing. For beginner investors, the time commitment required can hinder consistency. This is where robo-advisors can be beneficial since they do much of the heavy lifting for investors.
What is a Robo Advisor?
A robo-advisor uses technology to create automated portfolios for individuals who want to invest in the market. Robo-advisors can choose and execute an investment strategy based on individual needs and goals. While robo-advisors vary between providers, they generally function in similar ways.
How Do Robo Advisors Work?
Getting started with a robo-advisor is pretty straightforward. Prospective investors usually fill out a questionnaire about their current financial situation, investment goals, risk tolerance, and time horizon. The robo-advisor then formulates a diverse investment portfolio that aligns with the information provided. A team of investment professionals usually pulls together the portfolio selected.
After that, the investor’s part is done. The robo-advisor does the work of rebalancing the portfolio. Rebalancing a portfolio comprises buying and selling investments to ensure the investor’s goals are on track. Investors can also log in and update their goals as life changes arise.
The costs of robo-advisors can vary. There are typically two main fees: the advisory fee, also known as a management fee, and the expense ratio. The former is a percentage of a person’s invested money. For instance, some may charge 0.5% of an individual’s portfolio annually, while others could charge 0.25% of a portfolio.
Some robo-advisor providers waive the fee if investors maintain a certain minimum account balance. Bottom line: It’s important to get a comprehensive list of all fees before choosing a robo-advisor.
Hybrid Robo-Advisors
Some people aren’t enthused by the idea of automated management of their money. They may desire a human element as well. For said individuals, hybrid robo-advisors can be appealing. They combine robo-advisors with real-life certified financial planners or finance consultants, creating a holistic approach to investing. A hybrid robo-advisor gives investors who don’t want to be entirely hands-off the chance to participate in managing their portfolios. They can collaborate with hybrid-robo advisors by asking questions or sharing investing strategies. One thing to be aware of is that this type of robo-advisor may come at a higher price than traditional robo-advisors.
Pros and Cons of Robo-Advisors
There are multiple pros of robo-advisors. Some include:
- Ease: For beginner investors, robo-advisors can be an entryway to investing. Since automation does most of the work, the investors’ only concern is funding their portfolio.
- Affordability: Robo-advisors can be relatively cheap compared to traditional portfolio managers since technology or automation does the hard work. This can lead to greater gains over time.
- Long-term portfolio management: Investors won’t have to worry about what will happen to their portfolio in the short term, as well as in the future, since robo-advisors can handle that for the long haul.
There are some drawbacks of robo-advisors. These include:
- Lack of personalization: While robo-advisors tailor portfolios to stated needs, they can still lack the personalization an investor gets from working with a traditional financial advisor who has a complete snapshot of one’s financial situation.
- Access to human support: Those who opt for a traditional robo-advisor rather than a hybrid one won’t have access to humans who can answer specific investment and portfolio-related questions.
- Higher cost than DIY: Self-managing an investment portfolio may work out cheaper than using a robo-advisor.
Bottom Line
Before choosing a robo-advisor, people should consider whether it fits their personality as an investor. They also should consider the fees and how that might erode their bottom line. Finally, investors should compare the performance of each robo-advisor they’re considering, and how they’ve performed in past years before investing their money.
