Robo-advisors have been on the scene for a few years now, thanks to pioneering companies like Wealthfront and Betterment. One of the key marketing strategies for these digital advisors is to market themselves as democratizing investing, making it more accessible for beginner and lower net-worth investors.
Not surprisingly, many of these are young investors who are often digitally savvy and comfortable with using technology. So, it should come as no surprise that brokerages and financial firms target Generations X, Y, and Millennials with automated investing opportunities such as Robo-advisors.
What Robo-Advisors Do for You
Before 2010, you had two options for executing your investing strategies -- do it yourself or hire a financial advisor.
Investors of all experience levels can become overwhelmed, make mistakes. or give in to their emotions during downturns. Traditional financial advisors charge fees many younger or new investors might not be able to afford -- and there's no guarantee that your advisor will get you the results you want, either.
Robo-advisors appear to be making it easier for people to invest. They automate trading decisions, eliminate human emotion from the equation, and offer very low fees -- often, there are low minimum balances to get started.
Young investors, financial advisors, and even large companies like Vanguard and Fidelity have jumped in on the trend. However, robo-advisors are certainly not without their critics. It's still unclear how well artificial intelligence can execute strategies and maintain a portfolio's value in the long run.
The Benefits of Robo-Advisors
It's becoming clear that robo-advisors have many benefits, especially for younger investors, many who are at an early stage in their investing lives.
Easy to Use
First and foremost, they are easy to use, and most of their user interfaces (UI) are very intuitive.
For example, Betterment's UI allows you to set up your retirement goals and contributions within minutes -- you can even choose from cryptocurrency portfolios. The process of transferring your retirement plan from another institution into Betterment is also straightforward. Further, the use of automation also ensures that you are making contributions. In many ways, you can set it and forget it.
Convenience of Doing Everything Online
Times are changing. Not everyone likes interacting with people. Younger people especially prefer and are used to doing everything online. Robo-advisors help cater to that. You don't need to visit or talk to a financial advisor in person. You fill out some forms, and they do the rest.
Can Invest Small Amounts
Another reason robo-advisors are attractive is that you can invest whatever you have. Got an extra $20 leftover this month? You can easily deposit it into your account and invest it. Previously, the amount required for accessing certain funds was out of reach for certain income levels. Some robo-advisors require low minimum contributions, such as between $1,000 and $5,000 -- but several have minimums that range between $1 and $100.
Lower Fees
Perhaps a robo-advisor's most compelling aspect is the lower fees. Many offer free trades and no transaction fees. These two fees alone could cost you thousands of dollars if you were doing it yourself. However, they tend to charge an annual management fee based on assets held -- generally between 0.25% and 0.50% per year. Compared to the 1% or more charged by human advisors, robo-advisors may feel like a bargain.
Some People Prefer Robots
For many people, the thought of having a machine managing your money is scary. Not everyone feels that way, though. Some investors, particularly younger ones, are said to trust robots more than human financial advisors. Stories of scandals have spooked them and they view machines as less corruptible.
Looking After Your Money
The best robo-advisors may also offer services like tax-loss harvesting and automatic portfolio rebalancing. These services were formally reserved for the high-net-worth clients of elite financial advisors -- but robo-advisors have given average investors access to these strategies.
Some financial planners agree that robo-advisors have some significant advantages. Regular rebalancing requires substantial effort on the part of whoever is managing the portfolio. Digital advisors remove the hours of research, monitoring, and trading you might spend on your investments without them.
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