Robo advisors are online portfolio managers that manage investments using computer algorithms, or “robots”. They are very low cost because they do not have the same types of overheads traditional financial advisory firms have. Also, Robo-advisors can typically offer lower fees than many other investment management solutions due to their automated nature. If you are looking for an alternative to using a human advisor, here are five things you should know about Robo-advisors.
You don’t need lots of money to start using them
As little as $5,000 may be enough to get started with some Robo advisor app. Many services let you add more funds once your account grows beyond the initial minimum deposit. This makes Robo-advisors a good choice for people who want to invest small amounts regularly instead of investing a lump sum and then forgetting about it until retirement comes along in 30 years or so. Also, while most traditional financial planners charge fees by the hour, per project, or based on percentages of your total portfolio (which can be prohibitively expensive for people with smaller portfolios), you’ll generally only have to pay a management fee of between 0.25% and 0.50% annually, regardless of the size of your portfolio.
The main benefit is that they take away all the stress associated with investing
Robo advisor apps are great time savers because they do most of the legwork for you allocating your money into various investment options without needing any input from you along the way. These services typically include access to low-cost Exchange Traded Funds (ETFs) that give you exposure to US stocks, international markets, bonds, commodities, and other investments at rock-bottom prices. By using them, you can become a DIY investor without having to spend hours a week poring through financial news and research. Of course, the flipside of this is that you have no control over where your money is allocated, but as we mentioned above you won’t have to lift a finger once your account is set up.
Robo advisors can save you money compared with traditional investing services
If you’ve ever wanted someone else to take care of all the time-consuming tasks involved in managing an investment portfolio, Robo advisors are worth exploring. These automated services typically charge much lower fees than their human counterparts the average for all Robo provider fees was 0.24% in July 2016, while traditional wealth managers often charge 1% or more per year on top of underlying fund fees. Plus, since Robo advisors only charge a fee on the money they’re actually managing for you, you can keep all your other investments right where they are without paying an additional penny in management fees.
They have a built-in risk assessment to help protect your capital
Robo advisors typically build portfolios using a mix of ETFs with a total expense ratio (TER) of less than 0.20%, helping to shield investors from unnecessary trading costs and ensuring that investors aren’t exposed to excessive risk levels. In addition to diversification, Robo advisors also cater to different types of investors by incorporating their appetite for risk into their asset allocation decisions ranging from conservative all the way up to aggressive depending on what you prefer. The initial questionnaire you fill out when setting up your account will help the Robo advisor decide which portfolio is right for you.
You can use them to invest in things that may be too expensive on other platforms
Many of the popular investment choices don’t require high minimums, in fact, some of the most popular ETFs have set initial investments as low as $50 or less per trade. But there are also many underlying mutual funds with prices reaching thousands of dollars per ticket, which makes it impossible for most people to start investing unless they have a lot of money saved up.