Investing has gone high-tech these days thanks to the rise of robo-advisors. These online servicestake a lot of the hassle and cost out of managing your investments by cutting out the human middleman. If you’re working on building wealth, a robo-advisor can help youreach your goal. But you’ll need to weigh the advantages and disadvantages before handing over your money.
How Robo-Advisors Work
If you’re not familiar withhow arobo-advisor works, here’s a brief rundown. Basically,when you sign up for one of these services, you provide information about your investing goals, your income and your risk tolerance. A computer software program uses that information to choose investments for you and automatically rebalances your assets over time.
There are a few different reasons why a robo-advisor could be a good choice, particularly if you’re new to investing. For starters, the minimum investment to get started can belower than what traditional financial advisors require. That’s a plus if you’re working with a smaller pool of cash.
Robo-advisors also keep things simple, which may be appealing to younger investors who haven’t accumulated a lot of assets yet. If your tax situation isn’t particularlycomplicated or you don’t have any need for estate planning services yet, an online investment manager may be a good fit.
Cost is always a consideration when you’re investing with the goal of building wealth and robo-advisors can be a less expensive alternative to traditional advisor services. The managementfees tend to be lower because transactions are handled online and robo-advisors maypush cheaper funds – like ETFs – that carry fewer fees than other investments.
One last reason to choose a robo-advisor is the level of convenience it offers. If you don’t have time to actively manage your investments, using this kind of service eliminates some of the legwork.
Robo-advisors are beneficial for certain kinds of investors, but there are some situations where it makes more sense to go a different route. For example, if saving for retirement is your main focus, a financial advisor mightbe able to analyze your situationand help you fine-tune your plansso you’re in the best position to hit your goal. A financial advisor might be able to offer more detailed advice, on things like budgeting, career changes and when to retire.
A financial advisor can also help you with financial issues beyond investing. For example, if you’re trying to pay down debt or save for your child’s college years, they can offer advice on what steps to take so you can build wealth at the pace you want to.A robo-advisor might not be able to take those things into account when mapping out your investment strategy.
Finally, a traditional financial advisor brings a personal touch that you won’t get with an online investment service. That can be particularly important when the market takes a downturn, since a robo-advisorisn’t equipped to take emotions into account when making decisions. There is a trade-off, however, sincetraditional advisorstypically charge higher fees. But if you value that one-on-one connection, it may beworth it in the long run.
The Bottom Line
Robo-advisors are well-suited for folks who want a less hands-on approach to investing and don’t have trouble navigating online tools. If you want to keep your costs down while maximizing your returns, it could be an option worth considering.
But remember, there a number of upsides to working with a traditional financial advisor. If you think this option is better suited to your situation, SmartAsset can help you find an advisor who meets your needs with our financial advisor matching tool. Simplyanswer a series of questions about your situation and goals and then the program will narrow down your options down to as many as three nearby financial advisors. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Next Steps
Do you want to learn more about financial advisors? Check out these articles:
What are the Different Types of Financial Advisors?
Some robo-advisors offer tax loss harvesting, options to talk to human advisors, mobile 24/7/365 access via smartphone and other features. Robo-advisors cost less than financial advisors. Robo-advisor annual fees average about 0.50% of assets under management, while human advisors often charge from 1% to 2%.
In 2023, SmartAsset AMP helped advisors close over $34 billion in assets. To learn more about how the platform helps advisors grow their business, click here.
For some, the simplicity, accessibility, and lower costs make them a very appealing choice. However, for those desiring more personalized service and sophisticated investment strategies, a human financial advisor may be worth the additional cost.
Limited Flexibility. If you want to sell call options on an existing portfolio or buy individual stocks, most robo-advisors won't be able to help you. There are sound investment strategies that go beyond an investing algorithm.
High-net-worth investors exited robo-advisor arrangements at the highest rates. Here's how the data broke down along asset levels: $50,000 or less: A drop from 23.6% to 20.6% in 2022, which translates to a decrease of 3 percentage points.
If you require a high level of personalized service and direct management of your investments, a traditional human advisor might be better suited to your needs. Conversely, if cost and simplicity are your primary concerns, a robo-advisor might be the better choice.
How Does SmartAsset Make Money? SmartAsset makes its money in two main ways: commissions and partnerships. Financial planners pay SmartAsset for directing potential clients their way. This amount depends on how much money the client has to invest.
SmartAsset launched in July 2012 by CEO Michael Carvin and CTO Philip Camilleri as a Y Combinator startup company. The company's product offering initially revolved around home buying.
SmartAsset is an online destination for consumer-focused financial information and advice. Reaching approximately 59 million people each month (as of January 2024) through its educational content and personalized calculators and tools, SmartAsset's mission is to help people make smart financial decisions.
Robo-advisor performance is one way to understand the value of digital advice. Learn how fees, enhanced features, and investment options can also be key considerations. Five-year returns from most robo-advisors range from 2%–5% per year.
Funds' expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more.
Doing it yourself can give you more control, flexibility, and customization over your investments, but it also requires more research, monitoring, and discipline. You should consider your goals, risk tolerance, and investment style before choosing between a robo-advisor or doing it yourself through an online broker.
2 Cybersecurity threats. Another risk of using robo-advisors is that they may be vulnerable to cyberattacks that compromise your data and assets. Robo-advisors store and process large amounts of sensitive information, such as your identity, bank accounts, portfolio holdings, and transactions.
For hands-off investing with minimal fees, a robo-advisor could suffice. They can be a great choice for newer, younger investors. But for advanced planning and strategy, a human touch may still be required for advice you can trust.
Robo-advisors often build portfolios using a mix of various index funds. But depending on the asset class mix and the particular index funds selected, a robo-advisor may underperform or outperform a broad equity index like the S&P 500.
While it's smart to be cautious when trusting others with your money, a robo-advisor may be just as safe as a human financial advisor. But investing always comes with the risk of losing money, and that's true whether you're investing on your own, hiring a financial advisor or using a robo-advisor.
Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.
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