The landscape of investing has changed dramatically in recent years. Gone are the days when investors had to visit a local bank or brokerage office to make their trades. The rise of online trading platforms has made it easier for investors to buy and sell stocks, bonds and mutual funds from their homes. But as technology evolves, so does its usefulness in helping investors manage their portfolios—and that’s where robo-advisors come into play.
What Is a Robo-Advisor?
Robo-advisors are automated investment services. They use algorithms to make investment decisions, which can be as simple as selecting a portfolio of low-cost ETFs (exchange-traded funds) or more complex, such as combining traditional and alternative investments like stocks, bonds and real estate.
Robo investing has become extremely popular in recent years thanks to its low fees and easy access through online platforms, making it easy for investors who may need more experience with investing to get started quickly. SoFi experts say, “When it comes time to investing, time is the main ingredient.”
Pros of Robo-Advisors
- Automated portfolio management. Many robo-advisors offer automated portfolio management, so you can set your goals and let the platform handle the rest. You don’t have to worry about selecting individual stocks or bonds–the service does that work for you.
- No minimum deposit is required. If you’re just starting with investing and don’t have much money saved up yet, this could be an ideal option because there are no minimum deposit requirements at most robo-advisors (though some require a certain amount).
- Low fees and no minimum balance requirements mean lower costs over time compared with traditional active management strategies where investors pay 1% or more per year in advisory fees on top of other expenses like trading commissions.* Online access makes it easy for investors who travel frequently or live outside major metropolitan areas where brick-and-mortar branches are unavailable nearby.
Cons of Robo-Advisors
While robo-advisors offer many benefits to investors, they also have some drawbacks. The biggest drawback is the price–some services charge an annual fee while others are free but require you to pay higher fees for your investments.
In addition, there’s always the risk that something could go wrong with your account or you’ll lose money if an unexpected market event occurs (which are more common than you might think).
This can be especially problematic if you don’t have much experience investing in stocks and bonds yourself; if an advisor makes mistakes or fails to warn clients about potential problems ahead of time, then they may end up losing more than they would have if they’d invested directly in their own accounts rather than through someone else’s platform.
If you’re still intrigued by robo-advisors but don’t want to use one, there are other options. You can also invest in individual stocks and ETFs through traditional investment firms. Just like with a robo-advisor, these companies will charge you a fee for their services–but they’ll be lower than what the average automated service charges (which is 0.25% of assets under management).
Robo-advisors are a great option for people who want to invest their money but don’t know how or have the time to do it themselves. They can also be helpful for those who don’t have much money to invest but still want guidance on managing it. However, robo-advisors could be better – they may have higher fees than other options, such as human financial advisors or automated investing services like ETFs (Exchange-Traded Funds)
Additional Considerations When Choosing a Robo-Advisor
In addition to the advantages and disadvantages already mentioned in the article, there are some other important factors to consider when it comes to robo-advisors.
One possible downside is the absence of human interaction. While many investors appreciate the convenience and low fees of robo-advisors, some may prefer the opportunity to discuss their specific investment goals or ask questions about their portfolio with a human advisor.
It’s important to note that some robo-advisors do offer access to human advisors, although this may come at an extra cost. This additional support can be beneficial for investors who want personalized guidance and advice.
Another factor to keep in mind is the level of customization offered by robo-advisors. While most services allow you to choose a portfolio based on your investment goals and risk tolerance, the portfolios themselves may be limited in terms of diversification and asset allocation. If you have specific preferences or require a more tailored investment strategy, a robo-advisor may not be the best option for you.
It’s also worth mentioning that not all robo-advisors are the same. Some may offer more advanced investment strategies or better customer service than others. It’s important to conduct research and compare various options before deciding on a particular robo-advisor.
Furthermore, some robo-advisors may not offer tax-loss harvesting, which is a method that can help decrease your taxes by selling losing investments to offset gains. This can be a crucial factor for individuals with significant taxable investment accounts or high net worth.
In summary, robo-advisors can be a valuable tool for investors seeking a low-cost and user-friendly way to manage their investments. However, it’s crucial to consider the advantages and disadvantages, and also take into account your own investment goals and preferences. If you prefer human interaction or require a more customized investment strategy, a robo-advisor may not be the optimal choice for you.