The last time you navigated your way through a new city or neighborhood, you probably turned to Siri. Or maybe you opened up a GPS service device that offered you audible directions. Letting a robo-navigator guide you while driving to your destination makes perfect sense. Plus, Siri’s very polite compared to some human travel companions—who may spend the ride loudly judging your driving abilities. Much like we rely on technology to guide us while driving, we can let automated advisor services manage our investments.
How Automated Advisor Services Work
Robo-advisors, also called automated advisor services or digital advice platforms, use financial planning algorithms to guide each client’s investment strategy. These automated advisor algorithms operate with little to no human involvement once the investor’s initial account set-up is complete.
Clients submit their information by filling out an online survey, then enjoy access to their automated advisor services online 24/7. While the term “robo-advisor” dates back to 2002, the first robo-advisor service of this kind was introduced in 2008. Since then, the industry’s grown substantially—automated advisor services are projected to manage $2 trillion in assets by 2020. Automated advisor services may also offer portfolio rebalancing and tax-loss harvesting in addition to managing standard investments.
Top Three Automated Advisor Pros
There are three main pros to taking this type of investment approach:
- Standalone automated advisor services offer incredibly low annual fees. While human financial planners may charge fees equaling 1% or 2%, robo-advisors use flat annual fees of 0.2% to 0.5%. Some services charge a 0% management fee for managing everything except mutual, index and exchange-traded funds. However, those three investment options still carry expense ratios. That means you’ll pay an annual fee based on some predetermined investment percentage that helps pay for running the fund.
- You can get started without having to meet any minimum balance requirements. Yes, you can open a robo-advisory with just $100 to start—or even as little as $10, if you want! Breaking down any real or perceived barriers to investing that previously excluded people with modest incomes is a huge win. By contrast, clients whose portfolios include $10,000 or more in investable assets typically prefer personalized service from human financial advisors.
- You can log in 24/7, 365 days a year to get advice or rebalance your investments—business hours no longer apply. Just as online banking happens anytime, anywhere, your robo-advisor’s always available—if you have an internet connection and account password. Automated advisor services also make trading stocks or other investment changes more efficient for clients who keep busy schedules.
According to industry experts, independent startups that pioneered robo-investing services typically outperform traditional brokerage companies now offering automated advisor services. If you decide to go the robo-investing route, spend some time researching all the various options currently available to you. Each unique platform, app and service offer different investment strategy specialties, services, account minimums, and plan management fees.
Three Potential Cons of Using Robo-Advisors
Despite the many attractive robo-advisor offerings, there are a few cons to foregoing the human touch in managing your investments:
- You’ll face exactly the same financial risks as you would if working with a human advisor. While the securities laws that govern traditional brokers also apply to robo-advisors, the FDIC doesn’t insure algorithm-managed assets. Working with a robo-advisor, in other words, is not the same thing as conducting all of your banking transactions online.
- You won’t get any personalized advice about secondary issues that could influence your investment strategy. For example: Do you prefer to invest solely in “sustainable” or eco-friendly companies? What about those that don’t test their products on animals, etc.? If that’s true for you, then using an automated advisor won’t help you meet your investment goals at this time. Here’s another issue: Not everyone has clearly defined financial goals or understands what low, medium, or high-risk tolerance means. If you’re fuzzy on your goals and investment preferences, we recommend meeting with an actual human financial planner instead.
- Algorithm-based services cannot improvise or read your body language. Unlike creative humans, most algorithm-based advisors have limited options and zero emotional intuition. And that’s a problem because when it comes to their money, most people want empathy—and some sense of sophistication. This is especially true when financial issues become tangled up in issues that aren’t bound by logic. For example: When estate-planning is on the table for a parent or relative, emotion may rule the decision-making process. Or if you need help reducing the tax burden on an unexpected inheritance or other financial windfalls. Here’s another example: Setting rules for managing your children’s future trust-fund disbursements (e.g., by birthday, goal accomplishment or other milestones).
Which Option Best Meets Your Financial Needs?
So for most people, which investment approach is best: Robo-advisor, or human financial planner? Generally speaking, human insights and expertise combined with high-tech automation should meet any investor’s needs.
