Robo-advisors – Pros and Cons

Having a financial advisor is seen as a preserve of the wealthy. When you tell someone you’re looking for one, they immediately view you in a different light. They imagine you have tens of thousands in assets and investments. They view you as having accumulated a tidy sum and already financially independent. And no one can blame them. Financial advisors have always packaged themselves as service providers for those who have rather than those who have not. In fact, they say that the minimum investment amount you’re supposed to have in order to enlist their service is $50,000. Well, that all has changed. With the automation of portfolio management services through the Robo-advisors, financial advice has been rolled down to the masses. But what (or who) is this Robo-advisor?

Meet the Robo-Advisor

A Robo-advisor is an online, automated class of financial adviser that offers a similar service as the human financial advisors except there’s no human intervention involved. This is software that’s crafted with a set of algorithms that automatically allocates and manages your assets. It’s that simple. They were born in 2008 and have gradually become popular, taking a huge share of the cake from the traditional financial advisors.

Presently, there are over 100 of these Robo-advisors crunching the numbers for investors just like you and I. A study done confirms that robo advisors collectively manage a whopping $19 billion as of December 2014. The major automated financial advice service providers in the US are Betterment, Wealthfront, Schwab, Vanguard and TradeKing.

What’s the catch, you ask? Of course like everything else in life, there has to be the dark and bright side. So what are the pros and cons of the robo advisors? Let’s find out.

PROS

Low investment amounts

As we mentioned above, the human financial advisors require you to have at least $50,000 investment amount for them to be at your service. However, get this, robo-advisors only require as low as $500 minimum investment amount in order to open an account. Robo advisors such as Betterment don’t even require a minimum deposit for account opening.

These advisors are far less prejudiced and readily accessible to a majority of the middle class investors.

Lower Fees Charged

It gets better people. While traditional financial planners will charge you an average of 1.35% of the assets under management, the robo-advisors charge fees from 0.2% to 1.0% of assets under management. Do you see where I’m heading with this? Factor in the low investment amounts and it’s a no brainer why the robo-advisors are slowly stealing the thunder from human financial advisors.

Easy To Use

Need I say more? I Most, perhaps even all, robo-advisors come with a set of tools that assist the greatest of beginners in investment. It’s as simple as a couple of clicks of the mouse as it guides you on what to do. The tools are very easy and help you as a novice investor, make the stock or bond allocation decision without a hassle. And you don’t have to worry about accuracy issues as the algorithms used in these automated financial advisers are cutting edge.

Growing the Market

Having lower fees and being easy to use, robo advisors have encouraged demographics that wouldn’t have otherwise even thought of getting financial advice, to become their clients. What with the lower fees and ease of use more people are now encouraged to get professional financial management services.

Still, the robo advisors are designed to serve specific needs of different types of clients. They are flexible enough to fit you depending on which investment sectors you’re interested in, your net worth etc.

Higher Net Returns

You pay less for the financial management. Your portfolio is rebalanced automatically and helps you harvest tax losses. What could this amount to? A higher net return for you as an investor. And the robo advisor can get these done.

CONS

Non Personalized

Okay, it just isn’t like speaking to a human financial adviser face to face. They don’t listen to your personal situation and give you advice based on what you want. After all, they are automated so they may not answer all your questions and conclusively explain to you issues to do with investment markets. There are certain situations that go beyond a set of algorithms for instance, taxes, retirement issues or estate planning.

Limited Investment Options

If you have a more complex investment portfolio, the robo-advisors might not be able to assist you as they are only limited to the algorithms to determine appropriate investments. They have a limited number of ETFs (Exchange Traded Fund) within their platforms meaning that if you are looking for unique types of products, the robo advisors might not help you.

No Track Record

More importantly, Robo-advisors currently do not have long-term track record for performance.  There is no way to determine whether the this is a viable product over the long-run. Their algorithms are unproven over multiple economic cycles, which could be problematic in the event of another recession.

Are Robo-Advisors for You?

It depends. Your preference to use the robo advisors or traditional human financial advisors depends on your investment portfolio and your personal needs etc. For beginners, robo advisors are excellent. They’ll guide you through the whole process without making you feel intimidated. And the low fees are a good place to start. On the other hand, if your investment needs are more complex, you might want to stick with the human advisors or combine the services of both. One thing is for sure, the robo advisors have only just began showing us what they can do. Perhaps the cons associated with them will be ironed out in future as technology advances. They are bound to get better with time.

As usual, if you have any questions, Ask the Fellow!

 

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