Intro – Robo-Investing Using Robo Advisors
With the cost of living continually rising, building a large savings portfolio has become a major focus for many people. Utilizing the services of a financial advisor to help build your portfolio can pay off in big dividends – but it can also be fairly expensive.
For this reason, many people are choosing to utilize robo-investing and robo advisors as a cost effective alternative to mainstream financial advisors.
What Is Robo-Investing?
In robo-investing, the investor uses an online financial advisory firm in lieu of a brick and mortar financial advisory firm. The online financial advisory firm uses an automated stock trading software that utilizes algorithms to advise clients on how to invest their portfolios.
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When using robo-advisors, clients answer some questions online about their investment goals and how quickly they wish to achieve them, and a computer calculates a detailed financial plan for them, as well as automated trading strategies.
Because robo-investing is an automated trading desk, its financial advisement services can be offered to clients at a fraction of what it costs to use a human financial advisor.
How Much Do Financial Advisors Cost?
Hiring a financial advisor can be a costly business. How much financial advisors cost depends largely on the type of plan you choose, but you can end up paying anywhere from $250 to $500 an hour to meet with an advisor or between 0.75% and 1.5% of your total assets a year.
Traditional financial advisors might also require a large initial investment before they will work with you, with many requiring a six figure investment to start.
Hiring a financial advisor can be costly and require a large amount of capital upfront, which makes robo-investing a good choice for younger investors who are just starting out and want to begin building their portfolio but only have a small amount available for their initial investment.
Because they use automated trading strategies, robo advisors can provide financial advising at a much lower cost – typically around 0.25% to a little less than 1% of the amount you have invested with them with no minimum or a low minimum to be able to invest.
Overview of Firms That Offer Robo-Investing
Automated stock trading has taken off in the last few years and there are currently many robo-advisors present in the market for investors to choose from. Here we will go over some robo-investing reviews of the top contenders in the robo-investing marketplace.
Betterment is considered the front runner in the robo-investing industry and currently manages over $3.9 billion in investor funds. Betterment is a popular choice with consumers because they require no minimum balance to invest – just $1 is all it takes to get you started.
They also offer low management fees, charging only 0.35% for accounts with less than $10,000, 0.25% for accounts worth more than $10,000, and 0.15% for accounts with a value of more than $100,000.
Also, with Betterment, investors do not pay any commission or transaction fees, making it a good choice for beginners just starting out with robo-advisors.
Wealthfront Another top contender in automated stock trading, Wealthfront is unique from Betterment in that they allow investors with less than $15,000 in their portfolio to invest with them free of charge. While they do not charge any management fees on accounts with less than a $15,000 value, they do charge a flat rate of 0.25% on all balances above the $15,000 threshold. Another difference between Wealthfront and Betterment is the minimum balance required to open an account – whereas Betterment requires no minimum balance, you will need a minimum initial investment of $500 to begin investing with Wealthfront.
WiseBanyan WiseBanyan calls itself the world’s first free financial advisor; their slogan states that investing should be a right and not a privilege. Robo-investing with WiseBanyan certainly has its perks – the main one being that they do not charge any management fees whatsoever, no matter how small or large your investment portfolio with them is. They also offer a very low minimum balance to start investing, only requiring a minimum initial deposit of $10. WiseBanyan’s lack of management fees and very low minimum balance requirement makes them a good choice for new to investors with only a small initial investment available.
Charles Schwab In 2015, Charles Schwab threw its hat into the automated trading desk ring and began offering consumers the opportunity to utilize robo-investing to invest with them. Being able to utilize Charles Schwab for their automated trading strategies works well for those investors who like the security of investing with a large and well-established firm.
Like WiseBanyan, Charles Schwab offers their robo-advisor services with no management fee. Unlike WiseBanyan, however, Charles Schwab requires a much heftier minimum investment to start. Clients will need to have a minimum of $5,000 to open an account with the financial leader.
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Robo Advisors Who Offer Hybrid Services
The idea of allowing a computer to make all of their investment decisions for them can make some people uncomfortable. For those who feel a little squeamish about robo-investing but still want to be able to take advantage of the low management fees that they afford, there are some companies who offer hybrid robo-investing services.
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Hybrid robo-advisors offer automated trading strategies paired with a human financial advisor who reviews the results and works with the client on making decisions that he feels comfortable with. While there are many companies that offer hybrid robo-investing, in this article we will look at the two most popular options.
Vanguard Vanguard has begun offering hybrid robo-investing services through the launch of their Vanguard Personal Advisement Services. When clients sign up with Vanguard Personal Advisement Services, they are paired with a personal financial advisor who utilizes technology to find the best investment strategy for them. Using Vanguard will allow for a more personal experience than you get with many of the other robo-advisors in the market at close to the same cost, as they charge just a 0.3% management fee annually. However, choosing to invest with Vanguard is only for the more serious investor, as they do require a $50,000 minimum deposit to get started.
Personal Capital Personal Capital has coined the phrase “tech-enhanced advising” to describe their financial services offering, which pairs an automated, computerized algorithm with a human financial advisor to offer a more personalized robo-advising experience. While Personal Capital requires a lower minimum initial investment than Vanguard – $25,000 compared to Vanguard’s $50,000 – it is still high compared to other robo-advisors in the market. And while their management fees are lower than the industry standard for in-person financial advisors, at an annual rate of 0.49% to 0.89% they are still much higher than those of other robo-investing firms in the marketplace.
Weighing the Pros and Cons of Robo-Investing
There are good points and bad points to every situation, and choosing to work with a robo-advisor is no exception. When making a major decision such as who to allow to invest your money, you should carefully weigh all of the pros and cons.
The Pros of Working with Robo-Advisors There are many upsides to robo-investing, especially for the younger generation who is just starting out in their careers and want to get a head start on saving for their future. Some of the pros to choosing automated stock trading are:
Low management fees. Robo-investing offers much lower management fees than most traditional financial advisors charge.
Algorithms that use award-winning investment theories. The algorithms that most automated stock trading software uses are based on Nobel Prize-winning investment theories that were derived from some of today’s greatest minds.
Low minimum balance requirements. With many firms who offer no to very low minimum balances, anyone can afford to begin building their portfolio through robo-investing
They open the door for young investors to afford financial advice. Before the advent of robo-advisors, young potential investors without large monetary means were unable to afford to seek the advice of a financial advisor. Now, with robo-investing as an option, the younger generation is able to take advantage of getting an early start with investing.
The Cons of Working with Robo-Advisors
While there are many pros to robo-investing, there are also some downsides to working with an automated trading desk that should be considered.
Investment strategies are not personalized. Robo-investing entails answering some questions and a computer determining an investment strategy based on your answers. The problem with this is that the questions are not all inclusive. We are humans with different aspirations and goals, and we cannot have an in-depth conversation with the automated stock trading software to convey those to it.
No face-to-face meetings. Many people like the idea of being able to call or meet with their financial advisor when they experience a change in circumstance – such as the arrival of a new baby – or when the market has dropped more than they are comfortable with or when they are facing a life crisis and need to access some cash. Life is unpredictable, and robo-investing does not necessarily plan for bumps in the road. A human financial advisor can assuage fears and answer questions, but robo-advisors do not afford that option.
They don’t provide management guidance. Many people starting an investment portfolio don’t possess much firsthand knowledge about wealth management – which is the reason why they seek help from a financial advisor. For investors who wish to be able to ask questions and learn more about the terms and reasons behind certain strategies, robo-investing doesn’t provide them with much help.
Less rounded service than you get with a financial advising firm. There are many different types of investing. Robo-advisors offer a limited number of services to clients, while human financial advisement firms are able to integrate and manage all facets of your wealth management from helping you handle your taxes to estate planning. Working with a mainstream financial firm will give you access to advisors who are experts across many different areas, while with robo-investing your options will be limited.
With $53 billion currently under management by robo-advisors, the robo-investing industry isn’t likely to go anywhere anytime soon. The arrival of robo-advisors has opened the investment market to younger investors through their lower management fees and low minimum balance requirements.
Deciding who to let invest your money is a big life decision and should not be taken lightly. Be sure to do your research in carefully selecting the robo-advisor or financial planner that you believe is right for your individual financial needs.
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