- Robo-advisers offer a unique investment option that continues to grow in popularity.
- With a robo-adviser, you can expect to fill out a short questionnaire about your investment goals and have a computer take care of the rest.
- For a very low cost, robo-advisers can build a diverse portfolio in line with your needs and risk tolerance.
- If you’re ready to take the plunge, Wealthfront and Betterment are two of the best robo-adviser options available »
Robo-adviser investment services, such as Wealthfront and Betterment, have exploded in popularity in recent years. There’s a lot to love: they’re low cost; they’re easily accessible online; and you don’t need a financial planning certificate to understand them.
While there are still many robo-sceptics out there, these innovative investment platforms offer many benefits over human financial advisers, from cost savings to tax savings. Let me, an MBA and former bank manager, spell them out for you.
Investments are based on high-quality portfolios
Most financial advisers draw on a combination of their own education and experience. When you go to a large financial-advising firm, investment guidance is often based on a set of high-quality portfolios created by investment experts following guidelines for varying investor scenarios.
Robo-advisers take out the risk of smaller investment managers, and the middle-man from larger ones. With a traditional investment manager, your funds may be pointed to single stocks or funds that are not in your best interest, and they charge a hefty sum for the privilege. If you find an adviser who is a fiduciary, they are required to always invest in your best interest, but portfolios may be based on dated theories and the limited investment research time your adviser has to spare between clients.
With a robo-adviser, you get access to a high-quality portfolio built with someone like you in mind. For example, leading robo-adviser Betterment uses mostly Vanguard and other low-cost ETF families with a strong track record.
Robots don’t have emotions
A human might follow their instincts and choose a risky investment. It may pay off, but it might not. A human also follows emotions when buying and selling investments, but studies have shown that peopledo a badjob at buying low and selling high. Computers don’t have those emotions making decisions for you, which is best for your money.
Just as following emotions is bad for investing, timing the market has proven a bad strategy for investors. Rather than tinkering with things, robo-advisers pick the right investments for you and mostly leave things alone.
In the event of a market downturn, the worst thing you can do is sell. If you do, you’ll miss out on the upside when the market recovers. Robo-advisers know that and do the same thing a responsible financial adviser should do when faced with market volatility: leave your investments alone to ride the wave back up during the recovery.
Robo-advisers only use low-fee funds
Wealthfront, another popular robo-adviser, uses only low-cost ETFs, mostly from Schwab, Vanguard, and State Street, to build client portfolios. Many funds it uses have fees well under 0.10%, and none are higher than 0.23% (a municipal bond fund that makes up just a small portion of portfolios if it appears at all).
Because most robo-advisers invest solely through low-cost ETFs from popular providers, you know your portfolio has low fees and high liquidity.
Management fees are low and predictable
Most financial advisers charge based on a per cent of assets under management, or a flat fee. Fee-only advisers are the best human financial advisers for most people, but when a computer handles your investments, you pay a lot less.
Schwab Intelligent Portfolios is the leader in fee-free robo-advising. It charges nothing for its robo-advising service. While you’ll still pay fees from the low-cost funds your dollars land in, you won’t pay Schwab itself any advising fees.
The average robo-adviser charges around 0.25% to 0.35%, depending on your balance and the services you choose. That’s compared to the common rate of 1% for a human adviser. You’ll pay a human adviser about four times as much in management fees as you’ll pay Betterment or Wealthfront.
Automated tax loss harvesting
The market has good days and bad days. With the current climate in Washington, there has certainly been a lot of volatility over the past few years. The savviest investors take advantage of those market fluctuations with tax loss harvesting.
With tax loss harvesting, you can sell an investment that is down at a loss and immediately purchase a similar investment, locking in the tax loss without selling yourself out of the asset class. For example, you may sell VOO and buy IVV on a down market day, as both give you exposure to the S&P 500 index.
A person can’t physically keep up with this process the way a computer can handle tax loss harvesting. For larger portfolios, using a robo-adviser can add up to significant tax savings.
Robo-advisers are the future of investing
With portfolios based on Nobel research and investment strategies created by economics and finance PhDs, you know your funds are in good hands with a robo-adviser. While each has its own unique offering, high-quality providers like Betterment and Wealthfront offer sound investments tailored to your unique needs.
Robo-advisers shouldn’t perform significantly better than a great financial adviser, but not all financial advisers are great. Plus, robo-advisers cost a lot less than most financial advisers and keep your money exclusively in low-cost funds, so your all-in costs are significantly lower with an automated investment solution. Don’t discount this difference – it can easily be worth tens or hundreds of thousands of dollars to your portfolio over time.
If you have yet to come around to the idea of robo-advisers managing your money, it may be time to get on board with this growing trend. With the potential for better performance and a guarantee for lower fees, robo-advisers are the future of investing and a great choice for any modern long-term investor.
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