Investing and managing your finances has gotten a lot easier and interesting over the last few years. Mostly because of the technology advances that help people invest money with a few clicks.
And with that, the power of robo-investing has grown significantly lately, as it makes your investing life a breeze. Why?
If you do not enjoy reading and learning about investing, all the options and decisions can be quite overwhelming. There are tons of financial institutions, funds to choose, fees and expense ratios to understand, and a lot of other terms that seem confusing.
This is exactly why robo-investing and robo-advisors exist, to help alleviate that overwhelming feeling and get more people invested in their financial futures.
Below is what is covered:
What is it Robo-Investing?
The process of robo-investing is to ensure you have the most hands-off approach to your money, but are maximizing results. Instead of learning and having to self-manage your choices, you send this over to a robo-advisor that does the work for you.
Whichever robo-advisor you choose, then does the work to tailor your portfolio and make the necessary rebalances to ensure you are on track. The kicker is, there is little to no human interaction, it’s all managed by a built in algorithm.
Here’s how it works
You might have a good idea about how robo-investing works for you, but below are the basic steps most robo-advisors take.
- You sign-up for a platform of your choosing (some of the best ones are in the next section). Whichever one you choose will ask some simple questions about your finances, investing goals, and your risk tolerance (if you are going to be more aggressive or conservative).
- Based on your answers from above, the platform builds a tailored and recommended portfolio for you of how your money should be invested. This is done by the financial company’s computer algorithm, which is created based on actual research and knowledge from human financial experts.
- Your money is then invested into the recommendations, rebalanced, and requires you to do pretty much nothing at all. Most of these investing platforms do offer additional services for you to chat with a financial advisor or discuss questions. But otherwise, the platform does all the work for you!
Choosing the Right Robo-Advisor for Your Financial Goals
A robo-advisor is just the digital financial platform that provides you with the automated, algorithm-focused services where there is little to no human involvement.
You’ve already learned about how these companies work, but how do you choose the right robo-advisor? Most operate in the same way, but it comes down to a few other options like the fees, the minimum to get started, and what your specific needs are.
There are more companies popping up that offer these services, but these few below I find to be the better potential choices if you are considering using a robo-advisor.
Ally Financial has become one of the most trusted financial companies, especially with their online savings account and other options. But they also have a robo-investing platform. For those looking for managed investment portfolios and auto-investing based on your goals, Ally Invest is a great choice. Low fees, various tools, reporting, and support. Learn more and create your investing plan.
Betterment is probably one of the most recognized and popular robo-advisors on this list (Besides Ally). You answer questions, they build a recommended plan for you, and help you maintain tax efficiency. There is no minimum fee to get started and they also have low management fees. Learn more about Betterment here.
Many people have an employee-sponsored 401k plan, but there are a lot of funds and options to choose from. Blooom helps you analyze your current portfolio and goals, recommended funds, and other options. They also have financial advisor if you have questions. No minimum amount required, but there are monthly fees. However, you can get your free 401k analysis here.
I added Personal Capital in here because they are partially a robo-advisor, but also have a human element to help you. The algorithms pair you up with the right financial advisor based on your answers. The downside is, you need a minimum of a $100,000 for those services. But, you can use all their other free options and portfolio monitoring no matter your account size. Sign up for free here.
Are Robo-Advisors Right for You?
As with any financial decision you make, you have to decide based on your goals and lifestyle what is right for you.
For me, I’ve only been using two of the above robo-advisors, but I’m very hands on with my investing. It might be time-consuming, but I really enjoy learning about finances and investing.
Below are some additional positives and negatives of robo-investing to consider.
- Makes investing easier with busy lifestyles – Not everyone has the time or wants to make time to self-manage and learn everything about finances and investing. Robo-investing makes this easier and is quite accurate managing your financial life too.
- Can be more tax efficient – If you plan on having a taxable account (anything that is not a retirement account), robo-advisors offer services and recommendations to enhance your tax efficiency. Make sure to ask or read any FAQ’s of the robo-advisors to see how they help your taxable account.
- Anyone can take advantage of a robo-advisor – You do not need to be a financial expert, nor do you need a lot of money to get started with most platforms. This makes it appealing to anyone and everyone.
- They aren’t always as personalized as you might want – Robo-advisors are able to tailor your portfolio and make recommended changes based on your answers and goals. But, it’s not always as personalized as you might want or need. Some people like to tinker and move funds in a certain way, but with robo-investing there will be some limitations.
- Fees aren’t always lower – Yes, fees are generally low and even at a fractional percentage like 0.25% or 0.30%. But, the financial world of investing has greatly improved over the years. Vanguard, for example, offers some index funds that are .10% or .15% and gets you exposure to a diverse market. This is not a huge difference in fees, but something to consider. Remember with robo-investing your paying for the convenience factor.
- Loss of human interaction (other than potential calls with advisors) – With robo-investing, you lose most of the human interaction, other than some potential calls with advisors. But many people do enjoy building a relationship and talking in person with advisors, especially with money. So if you enjoy human connection or looking for that, then a robo-advisor might not be for you.
I know people who love robo-investing because it keeps them on the right financial path and they have no stress about figuring it out. But there are others (like me) who love having more control and have learned how to build a portfolio with low fees.
Robo-investing can be quite powerful and helps maximize your money, while also minimizing portfolio errors you potentially would make on your own.
What you have to decide is how much management and time you want to put in yourself.
I think robo-investing and robo-advisors are great options if you want to be more hands off, have consistent growth, and have automatic rebalances without you having to lift a finger.
This robo-investing market is also still relatively new and you might also be a bit sketched out about an algorithm managing your finance and investing. But, these platforms are continuing to become more intelligent and I’ve had great experiences myself using them.
Now it’s up to you to decide!What do you think about robo-investing and robo-advisors? Have you used these platforms? Good or bad experiences? Let me know in the comments below.