As technology has progressed and computers have become smarter, robo advising investment services have become more common. Robo advisors provide investment advice via a computer algorithm instead of a personal financial advisor.
What are robo advisors?
Robo advisors are basically automated investing services. When you set up an account with a robo advisor, such as Betterment or Wealthfront, you typically take a quiz. The quiz will look at things like your retirement goals and risk aversion. Based on your answers, the robo advisor will set up your portfolio allocation.
The computer system will also work to keep your portfolio performing well, and it will make trades and reallocation decisions for you. Some of these services will even perform tax loss harvesting.
The perks of robo advisors.
You don’t need a large nest egg to open an account. Robo advisors generally give you access to professional investment management without paying a fortune. With most of these services, the account balance minimums are low, and you can often open an account with no minimum investment.
Once you develop a plan, robo advisors help you stick to your investing goals, even in a down market. It’s easy to let the ups and downs of the markets push you into making poor investing choices. But if you set up your portfolio with a robo advisor, you don’t have to think about it.
Robo advisors work best for those with a hands-off approach to investing. If you don’t want to think about issues like diversifying and rebalancing your accounts, a robo advisor will do this for you.
No human touch.
If you want to interact with a person and regularly get an account representative on the phone to talk about your investments, using a robo advisor probably won’t meet your needs. A robo advisor might not be a good fit if you plan to be heavily involved with making your own investing decisions. You may be unable to frequently shift investments around on your own.
Robo advising services generally aren’t good at finding hidden earnings opportunities, such as up and coming businesses others might not see. If you’re looking for creative or innovative investments, you might want to work with a human financial advisor. Robo advisors are meant to perform in line with an index and stay the course over the long term, not to find the latest hot stock.
Is a robo advisor right for you?
A robo advisor may be a good fit for your IRA or taxable investments if you want to automate your investing and don’t want to be involved in day-to-day decision making. Robo advisors generally aim to perform in line with the market, rather than trying to beat it, in order to capture market gains. If you want to make more customized decisions about your investments or try to beat the market, you might want to work with an investment professional.
Of course, you can always test out both types of services to see which works best for you. Since you don’t need a large balance to open an account, it’s simple to transfer part of your savings to a robo advisor service while keeping the rest separate.