There are lots of different kinds of investors in the world. Some like to manage their own portfolios and control everything that happens. Others take a more hands-off approach. For that kind, robo-advisors can be efficient and affordable members of the financial team.
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Definition
What is a robo-advisor?
In a world where artificial intelligence is running amok, it probably comes as no surprise to anyone to discover that there are programs designed to act as a sort of financial advisor. These robo-advisors perform some of the same tasks as human advisors but at a fraction of the cost, making them a highly accessible option for investors with fewer investable assets.
Robo-advisors can work by themselves, performing specific tasks when specific thresholds are met or in tandem with a human advisor. When they're teamed up with a human financial professional, robo-advisors can make the human's financial decisions more effective by helping them execute trades more efficiently and noticing changes in trends more quickly.
Services it performs
What services does a robo-advisor perform?
Robo-advisors can help you reach your financial goals, especially if you are just getting started with investing. They can do things like assess your investment goals, choose exchange-traded funds (ETF) or index funds for you, rebalance your portfolio as the market changes, and even perform tax-loss harvesting as needed.
Typically, you can find robo-advisors for both individual retirement accounts (IRAs) and taxable accounts. They do not, however, generally function as stock brokers, instead choosing a basket of funds for you based on your goals. Don't expect a robo-advisor to beat the market since its goal is to maintain a balance with the market.
Costs
How much does a robo-advisor cost?
Robo-advisors are considerably less expensive than human financial advisors, who may charge 1% to 2% of your portfolio in fees. Prices vary, but most robo-advisors charge between 0.25% and 0.5%.
In addition, you also need considerably less money to get started with a robo-advisor. While many require $3,000 to $5,000 as an initial investment, you'll find plenty where you can get started with as little as $500. A few even have no account minimum, making it possible for anyone with a few spare dollars to employ a robo-advisor to direct their retirement accounts.
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Benefits
What are the benefits of a robo-advisor?
Although robo-advisors have been criticized for not being able to accommodate sudden changes in situations, market volatility, or directional moves in the market, a robo-advisor can do the job for most people who want some kind of financial account in most years. It's true they can't predict the future, but neither can human advisors (although human advisors can often turn to experience to make hard decisions in difficult market conditions).
Here are a few things robo-advisors do really well:
Save you money. If you don't need anything fancy and just want a basket of ETFs and index funds, a robo-advisor can handle this with ease. No need to pay more for these very basic offerings; instead, that extra money can go toward your retirement plans.
Respond 24/7. Unlike humans who need to sleep, robo-advisors are computer programs that can be reached at any time of the day or night. If you want to check your account balance or see how the robo-advisor has reallocated your account funds, it's simple to check when you have the time to sit down in a quiet place and focus.
Execute trades efficiently. Although you are highly limited in the types of accounts you can invest in, trades are executed in an efficient manner -- often, the moment your accounts go outside of their rebalancing bands. With a human, you'd have to wait until they are able to execute the trade manually, which could result in more loss.
Tax loss harvesting. It doesn't seem like a big deal, but tax-loss harvesting can save you so much money in taxes that it should be considered one of the most important jobs of a robo-advisor. With tax-loss harvesting, you essentially sell specific investments at a loss to offset gains in other investments, which is a very time-consuming job for a human.
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