What is a Robo-Advisor?
A robo-advisor is a computer program designed to help investors manage their own investments.
It is a low-cost, automated platform to manage your assets. Computer programs define a set of investment goals for clients and design an investment strategy based upon an appropriate set of rules. Rather than depending on a human financial advisor, clients get personalized investment advice from the robo-advisor.
Robo-advisors began to emerge in 2008. One of the first companies to introduce the world to robo-advising was Betterment. Nowadays, most online brokerage firms are offering robo-advising services to their clients. A 2016 study predicted 68% annual growth in such services over the next five years. Robo-advising services are estimated to total over $2 trillion by 2020.
How It Works
- Investors create an online account through a brokerage offering robo-advising services.
- Then the investor answers a few basic questions about investment goals and risk tolerance.
- The computer program then proceeds to create a portfolio of investments that suit the needs of the investor. The robo-advisor has a few different investment strategies and portfolios from which to choose.
- After finding the best match for the client, it invests the money in the chosen assets with appropriate diversification and risk levels.
- Then the robo-advisor continues to work 24/7 at managing the investment portfolio. Since computers never sleep, neither does the robo-advisor. The computer can make appropriate trades on the account at any time of the day to react to the most recent price changes and global training information.
- Financial advisors can be expensive, so robo-advisors make financial advising accessible to investors with portfolios of all sizes. Even investors just getting started with a few hundred dollars can utilize robo-advising services.
- Robo-advisors are great for investors with a small portfolio who would otherwise struggle to understand how to appropriately manage it.
- Even large investors with simple, basic investment needs can benefit from using a robo-advisor.
- Management and transactions fees are so small that investors using these services can earn a higher rate of return on their investment.
- While robo-advisors are great at handling investment portfolios with simple goals and basic investment strategies, they may not be right for every investor. Robo-advisors only generate investment decisions based upon a narrow view of an investor’s financial life. They cannot offer advice on whether or not the investment goals provided are appropriate for that individual investor.
- They do not have a full view of the investor’s financial position, including other investments, debts, and assets.
- Generally, they don’t allow for the investor to have any input into particular assets, and they don’t allow the investor to simply purchase a stock that may be of interest to them.
- For some investors, managing their money is not just a matter of math but also a matter of managing emotions through the ups and downs in the market and their lives. Computers are not very good at providing emotional support.
Robo-Advisors vs. Financial Advisors
A January 2017 report from Spectrem Group states that less than a decade after the first introduction of robo-advisors “certain investors now believe these technology-based advisory solutions may actually be better than human advisors at certain tasks.” Not all robo-advisors, however, are the same. Investors should research the specific costs and offerings of each company or advisor before committing.
Nerdwallet published a list of the best robo-advisors of 2017. The top ones are chosen according to different categories.
- Best Overall Advisors: Wealthfront and Betterment
- Best for Free Management: Wise Banyan and Charles Schwab
- Best for Access to a Financial Advisor: Vanguard and Charles Schwab
- Best for Taxable Accounts: Wealthfront and Personal Capital
- Best for IRA Management: Betterment and Fidelity Go
- Best for 401(k) Management: Blooom
How to pick the right advisor
Just as no two human financial advisors are the same, neither are two robo-advisors. Here are some things to consider when picking the right one:
- Is the robo-advisor able to plan for life events, such as marriage, college tuition, and retirement?
- Does the robo-advisor consider changes to your risk profile over time? For example, high-risk investments may be fine when you are younger, but you should consider switching to low-risk investments as you approach retirement.
- Is there a plan for how the robo-advisor should handle market downturns?
- Do you have access to a human financial advisor if you need one?
- North America is the largest robo-advising market, but Asia is catching up and expected to outpace North American assets under management by 2022.
- Business Insider Intelligence forecasts that robo-advisors will have $4.6 trillion under management by 2022.
- Robo-advisors typically charge .25–.35% of assets under management, while traditional financial advisors charge fees of at least 1% of the total assets under management.
Here is a recent study to include https://www.thestreet.com/story/13980489/1/key-facts-every-investors-know-about-robo-advisors.html