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What Are Robo-Advisors and Should You Use One?
In the past, when someone wanted to invest their hard-earned money, they had very limited choices. Basically, there were two choices available: getting through the whole process all by yourself and hiring a financial investment advisor. However, the most common problem when it comes to hiring a financial investment advisor is that most of them have a minimum asset requirement of around $500,000 or higher.
This kind of requirement makes a lot of FIAs inaccessible and unaffordable to all young and low net worth individuals. This means that all young people with a vision had to do everything on their own or get expensive advice from financial advisors that didn’t guarantee anything. Nowadays, with the appearance of Robo-Advisors, there is a brand new way of investing. So, the question is: are computers able to aid finance and replace humans when it comes to giving useful financial advice? Keep reading to find out.
What are Robo-Advisors?
Robo-Advisors are automated investment services. These services currently push down the price of high-end Wall Street advisors, which offer no real security. The appearance of this new investment tool is a good thing for the market. Additionally, these services can help people with asset allocation and goal setting – when parties don’t have a real idea where to start.
Like with a lot of other things, when it comes to financial advice, the “one size fits all” rule doesn’t apply. There is a lot of middle space between handling investments by yourself and hiring an advisor, and this space can be filed by Robo-Advisors, as many beginner investors and investors with a slim financial portfolio can take advantage of these services.
The question is, are these kinds of investments something you actually need? This can depend on your net worth, your financial knowledge, the ability to handle most things on your own and the level of complexity involved. There are a many Robo-Advisors out there and not all of them are completely automated, which means that they can help you by giving suggestions for long-term growth. The only thing that matters is to find a Robo-Advisor that suits you the most.
What are the differences between Robo-Advisors?
To someone who knows little about financial investments, the difference between companies that offer these services may seem small, but this is not the case. Here are the major differences:
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Asset Allocation;
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Minimum required deposits – with some firms you can start from scratch, while others may require considerable amounts in order to start;
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Annual fees – make sure to check for any ETF fees and hidden costs;
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The service can be 100 % automated or it can incorporate some human assistance;
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Type of account support;
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Tax optimization;
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They can manage a portion of your assets or all of them;
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You can be the main manager, while the company gives you advice or the investment can be handled directly by the company.
The most expensive service of all is Personal Capital, and it also has the most human assistance when it comes to interacting with clients. It is, more or less, like a traditional financial advisor that is aided by technology. The fees of Personal Capital include trading fees as well, and usually suggest individual stocks that can help minimize taxes and expenses. It is very important to consider the costs of service.
Is this a viable business?
The main concern everyone has when it comes to Robo-Advisors is whether they can survive in the long run. The annual fees that go under 0.50% may seem like quite a lot, but when you look on the other side, it’s not suitable for a company that has a significant amount of overhead (compliance, technology infrastructure and employees). These kinds of companies are making progress, however, if they want to remain profitable in the future, they will have to acquire billions of AUM (assets under management).
Are these services perfect? Not yet. Some traditional investors might suggest going for it on your own, which is only natural, since these firms are their competition. It all comes down to choosing the proper service really – if you find something that suits your investments, you should go for it.
