While there are many avenues to invest money in the markets today, the two most popular are either doing it yourself or with the help of a financial advisor. Going solo could save you money on fees but also adds risk if you’re unfamiliar with the markets. Financial advisors bring a wealth of knowledge and know-how but also cost more (and often require clients to have larger initial balances).
To bridge the gap between doing it yourself and partnering with a financial advisor, fintech and investment companies are creating a new way to invest through sophisticated programs called robo-advisors.
Robo-advisors are highly sophisticated programs that allow you to invest in the markets without needing a traditional financial advisor. Using a series of mathematical rules and algorithms, robo-advisors can instantly rebalance and diversify your investment portfolios based on specific market conditions.
When you begin working with a robo-advisor, you’ll typically fill out a survey or questionnaire to gather information about you and your specific financial goals. For instance, you’ll usually be asked your age, income levels, risk tolerance, net worth, and short- and long-term goals.
The robo-advisor will use this information to create a plan and portfolio of ETFs (exchange traded funds) and mutual funds that align with your financial goals.
Creating and managing investment portfolios with advanced software isn’t an entirely new concept. Financial advisors have been using similar software for decades. The only difference is that this technology was very expensive. Financial firms would purchase it for their advisors, who then used it with their clients.
Robo-investing brings this sophisticated technology directly to you – opening a slew of financial perks and new opportunities.
Price: Robo-advisors typically cost a fraction compared to the fees charged by financial advisors.
Convenience: Robo-advisors are available 24/7 and never take vacations or need days off. They can manage thousands of clients at once.
Decision Making: The sophisticated algorithms can make decisions and adjust your portfolio instantly based on current market conditions.
Initial Investment: While financial advisors typically look to manage clients with more significant balances and portfolios, robo-advisors require little to no minimum deposit to begin.
Regulation: Like a financial advisor, robo-advisors must be registered with and regulated by the U.S. Securities and Exchange Commission (SEC).
While technology can simplify complex processes and save time, there are always limitations. It turns out that the “human” aspect is also an essential part of investing wisely.
Limited Investments: Robo-advisors are limited in what funds are available – often with the investor having little say in what is selected. Most robo-advisors use a combination of ETFs and mutual funds, which can significantly minimize risk. But in such cases, you have limited options as you cannot typically choose specific investments, buy individual stocks or bonds, or diversify into other areas.
Lacking in Advanced Investing: If you already have a significant amount invested or you’re nearing retirement, your plan will likely be more complex. You would probably have a variety of investments outside of ETFs or mutual funds and need to plan for taxes down the road. This is where the wisdom of a financial advisor becomes invaluable.
Personal Situations: Life happens. Perhaps you have lost your job, are getting married, want to buy a house, or are facing unforeseen medical expenses – all these things can impact your financial life. These are areas where a financial advisor can be a more significant asset to you.
One of the greatest perks of robo-advisors is that they are accessible to everyone. But that doesn’t mean they are the best option for all. Typically, this investment option works best for:
New Investors: Robo advisors can be an excellent option for younger people just starting out. They want to start saving but might not have enough funds or the need to partner with a financial advisor just yet. The automated, easy process can help them invest without worrying about the added fees or minimum balances.
Late Investors: If you’re late to the game and are behind on your retirement savings, robo-advisors can be a great option. They’ll introduce you to investing, set up a systematic investment plan, and get you comfortable with saving regularly.
Second Opinion: Many people are curious if a robo-advisor is better than a human financial advisor. You might consider investing a portion of your savings using the services of a robo-advisor to see how it compares to your financial advisor’s performance.
Every day new technologies emerge that simplify complex problems. Robo-advisors are giving everyone the opportunity to invest and save money with ease. While this service packs substantial fiscal perks, it also comes with limitations and potential risks.
Before making any investment decisions, you should always weigh the pros and cons. If you’re unsure, ask for help or consider only dipping your toes into robo-investing at first. The combination of using both a robo-advisor and a traditional financial advisor might be the best of both worlds.
Investing in the stock market or other avenues is not without risk. Most investments are not federally insured, and you can lose money. Before deciding which option is best for you, it’s always wise to learn more and understand the risks.
If you’re interested in investing or long-term financial planning, take a look at our newest investing tool, EasyVest. Our financial advisors are available to answer all your questions and help you make the best fiscal decisions.
To speak with a financial advisor, please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to schedule an appointment today.
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