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For novice and hands-off investors, robo-advisors are one of the best ways to handle your investments. They are attractive with low costs, user-friendly interfaces and minimal work on your part. If you are tired of making investment decisions, let the robots take over.
If you are just starting out in investing and want to explore all your options, you will want to know what a robo-advisor is and if a robo-advisor is for you.
What is a Robo Advisor?
A robo-advisor is automated investment software that uses your personal investment information to make investment decisions on your behalf. They are great tools for novice and advanced investors, and they make investment decisions based on information you provide, such as your age, when you want to retire, and your risk tolerance.
“The first robo-advisor to hit the market was Betterment in the wake of the Great Recession,” said Riley Adams, a CPA, senior financial analyst at Google and owner of Young and the Investors† “The company pioneered the idea of asking their users questions and making investment portfolio decisions based on these answers and the goals they have.”
Over the past nearly 15 years, other companies have joined or established robo-advisors at existing companies. For example, Fidelity has Fidelity Go, the robo-advisor offering alongside the traditional consulting platform. Betterment, Wealthfront, and Ellevest all started out as robo-advisors.
How robo-advisors work
When you sign up with a robo-advisor, they all start with some basic questions about you, such as how old you are, your investment goals, and how much you can reasonably contribute to your account. Based on algorithms or mathematical rules and formulas, the tool determines a suitable model for your investment portfolio based on your needs and preferences.
“A robo-advisor platform has an initial data collection process where you answer questions related to your finances, risk tolerance, and timeline,” said Cassandra Kirby, private wealth advisor at Braun-Bostich & Associatesa financial consultancy.
Using software, the robo-advisor puts together your entire investment portfolio within minutes. You can do it without ever talking to another human being. This is one of the most appealing parts.
“One of the best ways to outperform the stock market is by not making mistakes like everyone else does,” Adams says. “Often emotion drives these mistakes. Robo-advisors do not fall prey to emotions, but instead rely on programmatic investment elections and asset allocations.”
Some people like the idea of working with a human to get specific, tailored financial advice. But it is not required to get started or even have an ongoing relationship with your investments. A common barrier for novice investors is dispelling the notion that you need to be an expert investor. In reality, you only need a few dollars (and minutes) to get started.
Our Favorite Robo Advisors
According to a recent NextAdvisor survey of personal finance experts, Betterment was the clear favorite. But there are other great robo-advisor options available to investors. Check out some of our favorites below.
Improvement is a crowd favorite when it comes to robo-advisors. Julien Saunders, co-creator of rich & REGULAR, a husband-and-wife-run online financial community, says he likes Betterment for its flexibility. It gives investors the option to select pre-built portfolios or build their own portfolios.
Fidelity offers its Fidelity Go, its automated investment advisor. It offers a low cost, $0 to open an account, and the service is free for credits of $10,000 or less.
Haley Sacks, founder of Mrs. Dow Jones, joins Wealthfront as her favorite robo-advisor. She attributes it to its easy-to-use platform and financial planning tools. Her only complaint is that there are no people associated with the app. “Would like to have access to a financial planner,” she tells NextAdvisor.
New to its investment services, SoFi has no account minimum to get started and no management fees for automated investment accounts. It has several investment plans to choose from, such as retirement accounts or taxable accounts.
Ally needs $100 to start investing with a robo-advisor. The company also has 24/7 customer support and sets up your account based on your goals and risk tolerance.
Ellevest has no account minimums to get started and offers three levels of service, starting at just $1 per month. Investors, though, Ellevest has access to IRA accounts and personalized retirement planning through the $5 per month plan called Ellevest Plus.
Cost of a Robo Advisor
Most robo-advisors charge a flat monthly fee or percentage of assets under management (AUM), somewhere around 0.25% to 0.50%. Adams says your portfolio determines what compensation works best for you.
“If you plan to build a large portfolio quickly, choosing a low fixed fee can save you more over time,” he says.
Let’s see what that looks like in real money. Ellevest charges $1 per month for its essential tier, which includes investing. If you open your account with $5, 20% of your fees will go to the Ellevest platform. As you keep adding money, that percentage goes down. If you have $100,000 in your account, $1 is 0.001% of your assets under management – much less than some competitors.
Improvement costs 0.25% of your assets under management. At $1,000, that works out to about $2.50 per year. But for $100,000, that’s $250 a year.
These may seem like large numbers, but using a human financial advisor can cost you even more. Adams says most financial advisors charge 0.50% to 1.5% or more of AUM. But you get personalized attention, with someone working out a full financial plan and managing your investments made just for you.
In addition to robo-advisors, there is still an option to manage your investments yourself. Choosing low-cost ETFs, target date funds, or mutual funds that track broad indices are good options. Just be sure to choose funds with low expense ratios or fees.
Some robo-advisors offer a hybrid option where you can usually work with a robo-advisor but offer financial advisors for when you want to talk to someone. Sometimes this is included in your rate, sometimes it is an additional fee.
Overall, though, these services make it easier to start planning for the future and get your financial goals in order.
For many novice and novice investors, robo-advisors can be a great way to invest. With low costs and minimal management, you can get started with just a few dollars.
Is a Robo Advisor Right for You?
Getting started with investing is going to require some homework. To make sure you choose the right type of advisor, ask yourself a few questions, such as:
What are my needs?
If you don’t have a lot of wealth, family or even any knowledge about investing, but you know how beneficial it is for long-term financial growth, a robo-advisor should suffice. But the more money you have (and the more assets you own), the more you may need tailor-made financial advice. This way, someone can work with your particular situation to make sure your investments work well for you.
What can I handle?
If you’re interested in learning the ins and outs of the stock market and handpicking your stocks and other securities, you may want to look to discount brokers rather than robo-advisors. Brokers let you do all the work yourself and the costs are usually lower compared to robo-advisors depending on what you invest in.
What are my long-term investment plans?
The vast majority of people only use investment accounts to fund their retirement. But that doesn’t mean it’s the only type of investment account out there. If you want to set aside money for your pension, you can arrange this with a robo-advisor. If you need help with other financial matters, such as buying a home or getting your budget in order, consider talking to a financial advisor.
Can I talk to a human?
If you really don’t want to miss out on human interaction, it’s fine to explore personal financial advisors. But if you are just starting out with investing, a financial advisor may not be beneficial and a robo advisor will suffice.