Robo advisors may seem like a futuristic way to invest your money, but they’re quite practical. If you’re an investor who wants to avoid the high price of a human advisor, a robotic one would seem to be just the ticket.
We’re offering this New Jersey Bookkeeping tip: things you need to know about robo-advisors, not to promote them, necessarily. We’re offering it so that you’re aware of some of the advantages and drawbacks of this style of investing.
As with everything, there are strengths and weaknesses inherent in the approach. We hope this primer gives you a good overview.
A Little History
Robo-advisors have been available since 2005, but this style of algorithmic, automated investment management didn’t really go “live” until the advent of Betterment and Wealthfront (both launched in 2008).
And they’re only becoming more popular. By 2020, it’s estimated that robo-advisors will be managing as much as $2 trillion in investor assets. Why are they so getting so much play? Let’s find out.
What Investors Like
A lot of people out there want to invest their money, without being sure how. Robo-advisors are an easy way to get in the game. They’re simple to use and don’t require an in-depth knowledge of financial markets.
With just a little bit of your time, you can be an investor. Even with just a few hundred dollars (or sometimes, no dollars), you provide some basic information and you’re off. All you do is tell your robo-advisor what type of investment you’re looking to make.
The robo-advisor does the rest, offering best bets for the sector you’re looking at. This is achieved with the use of algorithms.
Investment is simplified, popularizing the whole concept of investing and eliminating some of the chest-thumping terror of throwing money into the arena.
Robo-advisors are also attractive to novices because of their low fees. For example, Weathfront charges no fee for the first $10K invested and then, applies a fee of only 0.25% (as opposed to the 1% fee associated with traditional investment advisors).
Robo-advisors are creating opportunities to invest for people who might otherwise be too intimidated to do so, simplifying the process, automating it and making if financially accessible.
What’s Not to Like
Some investors may be taken aback by the impersonal aspect of robo-advisors. Let’s face it, there’s nothing less personal than automation.
And if your financial planning is complex, you’re also not going to be that happy with going this route. For example, you’re not going to receive the kind of advice you need to diversify your portfolio. There’s nothing bespoke about robo-advisors and some don’t feel comfortable with that.
For our money robo-advisors are worth a try, especially for those who are risk averse and want as sure a thing as possible. But everyone’s different and those seeking a more individualized experience involving actual human beings may not find it to be the right fit.
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