What Is a Robo-Advisor and Is One Right for You?

Apr 19, 2022

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If you’ve ever dreamed of robots to take care of your home or take your dog for a walk, You’ll be able to appreciate why people are drawn to a robotic advisor. They do not offer pet sitting or windows. However, what they provide is certainly more beneficial: a non-hands-on approach to investing.

Robo-advisor definition

Robo-advisors -also referred to as automated investing services, utilize sophisticated algorithms in computers and software to manage and build your portfolio of investments. They offer everything from automated adjustment of balances to tax optimization and require only minimal human interaction. However, most providers have human advisors who are available to answer queries.

Traditional portfolio management services typically need high balances. The majority of Robo-advisors have no minimum requirements. Due to their low cost, robot advisors allow you to begin investing fast and, in most cases, in just a few minutes.

What are the costs for Robo-advisors?

Robo-advisors cost less than a person-to-person financial advisor. Most companies charge between 0.25 percent to 0.50 percent for an annual management cost. However, there are no-cost options such as Sofi Automated Investment.

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Like many different financial professionals, charges are charged in proportion to the assets in the Robo-advisor’s hands. The charge is usually swept from your account and then prorated and billed monthly or quarterly. If your account balance is $10,000, you could be paying as little as $25 per year.

It is not common to pay fees for transactions with a Robo advisor. In a typical brokerage account, you could be required to pay a commission when you buy or sell your investments, rebalance your portfolio, and withdraw or deposit funds. Robo-advisors often waive these fees.

Is a Robo-advisor just the way for you?

If you are deciding if you should use a Robo-advisor for you, you should consider the following factors:

  1. The type of account: The majority of Robo-advisors handle individual retirement accounts and taxable accounts. They also handle trusts, and a handful can help you manage your 401(k ) accounts.
  2. Minimum investment requirements: Certain Robo-advisors require minimums of $5,000 or more, but most of them have minimums as low as $500.
  3. Portfolio recommendation: When you sign up for an automated advisor, your first contact will most likely be a questionnaire that will assess your objectives, risk tolerance, and investment preferences. The service algorithm will suggest an investment in response to these questions. However, you’ll be in a position to reject the suggestion if you’d like an alternative. Robo-advisors typically offer between five to 10 portfolio options with a range of options from moderate to aggressive.
  4. The selection of investment: Robo-advisors typically make their portfolios from ETFs that are low-cost exchange-traded funds (ETFs) or index funds that are investment baskets that aim to mimic the performance of an index, such as those of S&P 500. You’ll be charged the fees imposed by these funds, also known as expense ratios, and the management fee charged by the Robo-advisor.

Typical Robo-advisor services

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The principle behind most advisors is similar: automate investment management to handle it with a computer for a cheaper cost. With the majority of Robo-advisors, you will find:

  • Rebalancing the portfolio regularly, whether by hand or at specific intervals, every quarter. Most advisors perform this using a computer-generated algorithm, so your portfolio is never out of alignment with the initial allocation.
  • Tools for financial planning, including retirement calculators.
  • Tax-loss harvesting as well as other tax-saving strategies on tax-exempt accounts.

Suppose you’re looking for or require more extensive financial planning or are unsure about leaving your financial portfolio in the hands of a laptop. In that case, you might be attracted to online financial planning services.

What exactly are these online services?

They function as financial advisors online and a traditional advisor, Robo-advisor hybrid. You’ll have unlimited access to a group consisting of financial advisors (or often your personal financial advisor), however, and you’ll be able to meet online via video or phone instead of in person. This is a way to have human supervision and interaction for less than traditional financial advisors.

The price and minimal investment requirements for financial advisors online rise depending on the degree of human interaction, the certification (such as the ability to access a qualified financial planner’s services), and personalization.

  • Vanguard Personal Advisor Services offers access to a group of financial experts for the minimum account size of $50,000 and an 0.30 percent fee. You’ll receive portfolio management and answers to your financial queries but not a personalized financial plan. 
  • Charles Schwab’s Intelligent Portfolios Premium provides access to an advisory team that will create a custom financial plan to oversee your investment portfolio. Schwab requires an account balance of at least $25,000 and a monthly fee of $30 per month with a one-time charge for the planning of $300.
  • Facet Wealth offers each client an individual financial advisor. The company has a flat annual cost that begins at $1200 per year and grows according to how complex your financial planning requirements are. You receive individualized advice as well as a comprehensive financial plan. The service also includes investment management.
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