If you’re interested in personal finance and investing but are just diving into the world of FinTech (financial technology,) you may have heard about Robo Advisors.
You’ll often hear the term thrown around in the same sentences as “automated investors” or “automated financial advisors.” You most likely landed on this page because you were searching for the answer to what these services are.
So, what exactly are Robo Advisors?
Robo Advisors use special algorithms to evaluate and manage your investments. These algorithms determine the best financial strategy for your account, and they allow Robo Advisors to operate efficiently and at a far lower cost than human financial planners.
Robo Advisors are generally restricted to the area of portfolio management and retirement planning. Even though they usually don’t handle cash-flow management or estate planning, their services are quickly expanding. Many of them now offer college savings plans, 401(k) management, micro-investing, and more.
Robo Advisors can radically change the effectiveness of your investment accounts. Back in the old days, this type of service was only attained through a human financial advisor as part of a wider (and more expensive) bundle of services.
Thanks to Robo Advisors, automated portfolio management is now available to a larger network of investors. And they are cheaper, too.
Are Robo-Advisors Better than a Personal Financial Advisor?
We’re not saying that Robo-Advisors are better than a personal financial advisor in all aspects, but the advantages are too hard to ignore:
- Robo Advisors open new doors to smaller investors, who could only get market guidance through traditional methods, like hiring an expensive human advisor.
- Access to advanced investment techniques like Tax Loss Harvesting even with a small initial investment.
- The automated system means lower transaction fees, saving you money from the beginning.
- Lower management fees means big savings for big investors.
- Low barrier of entry; many robo advisors have low or no minimum investment.
- Protects all investors from avoidable risks such as greed and conflict of interest.
How do Robo Advisors Work?
The exact workings of Robo Advisors will differ depending on the service that you choose. However, they generally operate on the same principles.
This is precisely why you need to read our expert Robo Advisor reviews. We give in-depth reports on the best Robo Advisors in the business, so you can determine the best automated investment service for your preference and budget.
What Happens After I Sign Up?
After signing up and answering a few important questions, you then deposit or transfer the required investment amount.
However, asset allocation is just the tip of the iceberg for Robo Advisors as they also provide many other account services.
What can Robo Advisors Offer to Investors?
Robo Advisors generally provide a wide range of portfolio management services. Many of them can also provide automatic rebalancing, automatic dividend reinvestment and tax loss harvesting – features that used to only come with expensive financial planners.
Automated portfolio rebalancing is when a Robo Advisor automatically adjusts the allocation of assets within an investor’s portfolio to maximize returns. Usually this changes monthly based on the path of the investor due to their age, budget, asset allocation, or financial goals.
Dividend reinvestment is when the service recognizes the pay-out of a dividend, assesses the best way to reinvest that money and then goes ahead and does so without any outside interference. This helps keep your portfolio from holding too much cash, which earns at a near-zero rate.
Tax loss harvesting is a slightly more complicated feature. In simple terms, it is the process in which the Robo Advisor chooses the optimal time to sell a security which has experienced a loss. This is to offset taxes on other gains and profits. Learn more about tax loss harvesting here.
How much do Robo Advisors cost?
The answer is not a lot when compared to what a human advisor can cost. Many Robo Advisors even offer a free service (read more about those here,) and only charge fees after reaching a certain balance, if at all.
Fees eat away at your bottom line
And that’s just with 1% fees; some financial advisors charge much more. With 0% fee you get more and can invest more!
The cost of an automated investing service generally comes in the form of management fees, which are either charged as monthly fee or as a percentage, based on the account balance.
The types of management fees vary from one advisor to another, but in general tend to fall between $1 and $20 per month or between 0.15% and 0.75% per year.
According to Bloomberg, traditional brokerage firms such as Morgan Stanley, Bank of America and Wells Fargo are under pressure to justify the high fees they charge investors. Even they are scrambling to develop automated investment tools for their customers. Robo Advisors handled many more portfolios in the year 2015 than in 2012, representing a 210% rise amounting to over $50 billion in investments. And that growth is not showing any signs of slowing down.
Robo Advisors are growing fast, and we are dedicated to providing you with comprehensive and expert reviews and guides to the best Robo Advisors online.