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.
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