When it comes to investment management, there’s a new game in town: automated investment services, also known as robo-advisors. If you’ve heard of them, maybe you’re wondering if they’re a good choice for you. If not, you might just want to know what they are! Either way, we’ve got it all covered here.
How Do Robo-Advisors Work?
Robo-advisors consist of computer algorithms and software that create and maintain portfolios automatically. Getting started with a robo-advisor typically involves answering some questions about your risk tolerance and investment time frame. Then the robo-advisor will recommend one portfolio from its available options that best fits your responses. Depending on the provider, you may also have access to chat or video calls with humans. So how do robo-advisors stack up against their human counterparts?
What Robo-Advisors Do Best
- Cut costs. Many robo-advisors’ yearly management fees are 0% to 0.5% of your total investment (human investors usually charge at least 1%). Robo-advisors tend to have lower minimum investments, in the range of $0–$5,000, versus $100,000 and up for more traditional options. And robo-advisors often waive transaction fees.
- Make investing convenient. Robo-advisors offer 24/7 access as well as automatic contributions, allocation, and rebalancing. Ease of access can encourage people to start investing when they otherwise would put it off or not do it at all—a win-win.
- Reduce human error. Robo-advisors aren’t perfect either, but they’re typically built to follow best investing practices—and, unlike with a human, you won’t have to worry about personality clashes or conflicts of interest.
What Human Advisors Do Best
- Give holistic advice. Robo-advisors may get you started on investing, but that’s just one tool in the financial toolbox. Human advisors can put investment into context in a broader discussion of financial planning and ensure that you’re using all available financial tools to increase your net worth.
- The larger your balance and the more complex your portfolio, the less likely it is that a robo-advisor will be able to optimize your investments. Robo-advisors can’t adjust to fit your personal goals or offer investments beyond the preselected options. Human advisors, though, will tailor a portfolio to your unique circumstances.
- Provide the human touch. Sometimes talking to another person is the only way to avoid mistakes that robo-advisors won’t pick up on, like panic-selling when the market drops. Human advisors can also help keep you accountable for your long-term goals, just like having a workout buddy motivates you to stick with your morning run.
The Bottom Line
Robo-advisors tend to be a better choice for beginning investors or those with a small minimum investment. Human advisors may be more suitable for investors with large portfolios or a need for specialized advice and management. What’s right for you depends on all of those factors and more, so always do your research and make an informed decision on what kind of management makes sense for your situation.
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