In the world of finance, the intersection of technology and investing has given rise to robo-advisors. In the United States alone, the robo-advisors market is expected to reach 34 million users by 2027. The number showcases its growing popularity among investors.
But what exactly are they, and should you be using one?
This post will explain what robo-advisors are, how they work, and who should consider using them to enhance their investments.
Robo-Advisors Explained
Robo-advisors are automated investing services that create and manage investment portfolios using software and computer algorithms. They require little to no human input. However, most robo-advisor providers have human advisors to assist you in case of any issues.
Unlike traditional portfolio management services, robo-advisors generally don’t have a minimum balance requirement. If they do, it tends to be low. This means they’re far more accessible than traditional investment services, and you can start investing quickly, even if you’ve never done it before and have little capital.
Some of the most popular robo-advisor services in the U.S. include:
- SoFi
- Betterment
- Wealthfront
- Schwab Intelligent Portfolios
- Vanguard
Automated vs Self-Directed Investing
Self-directed investing is when you make all your investment decisions without assistance from a human or robo-advisor. This method is best for those with vast investing experience and knowledge of financial markets and investment strategies. Suppose you don’t have this knowledge and experience. In that case, self-directed investing can be very risky.
Automated investing removes some of this risk by making investment decisions for you. Rather than researching stocks and funds to buy, your robo-advisor will usually build your portfolio from low-cost index funds and exchange-traded funds (ETFs).
Before your robo-advisor starts building your portfolio, it will ask you to complete a questionnaire. It uses the information to determine your goals, risk tolerance, and investing preferences. A portfolio is then recommended based on your answers.
Of course, if neither self-directed nor automated investing appeals to you, you could use a human financial advisor to guide your investment decisions instead.
Is it worth using a robo-advisor?
Plenty of robo-advisor services exist, and some are more affordable than others. So, it’s worth comparing several different providers to see which would be most worth it.
Generally, robo-advisor providers charge an annual management fee of 0.25 to 0.50 percent. It is less expensive than human financial advisors. They charge these fees as a percentage of your assets that are controlled by the robo-advisor.
For example, if the provider charges an annual fee of 0.25 percent and your assets amount to $20,000, you would pay $50 a year. So, using a robo-advisor is usually worth it.
The Verdict
Robo-advisors are best suited to investors with little experience and capital. They lower the entry barriers to the world of investing as they have low balance requirements and only charge a small annual management fee.
They save you the time, hassle, and expense of creating your portfolio from scratch. They also manage your investments while you get on with other things.
