Robo Advisor Pros and Cons
What are the robo advisor pros and cons? Here, you’ll find the definition of a robo advisor, a list of the pros and cons, as well as any recommended robo advisors.
What is a robo advisor?
Robo-advisors are automated financial planning that are algorithm based. They require little to no interaction with you, ask questions regarding your situation, risk tolerance, goals, etc. Based on your responses and preferences, they’ll automatically invest for you. So you deposit the cash, they’ll figure out what best fits your risk tolerance, goals, situation, etc. Robo-advisors replace that of a human financial advisor, only it’s typically through an online platform or app.
Similar to human financial advisors, robo-advisors use the information you provide based on your situation to create an investment portfolio catered to you. This portfolio will include a customized mix of assets (stocks, bonds, index funds/ETFs, etc).
So, what are the robo advisor pros and cons?
Robo Advisor Pros
1. Low Cost
Based on this article, the average robo advisor fees vary between 0.25-0.30%. In comparison, human financial advisor fees vary between 0.25-1%. As you can see, robo advisors typically have lower fees. This makes robo advisors the more affordable option; hence, making them more accessible to investors.
2. Convenient
Robo advisors are more convenient, because you’re able to manage investments through the online platform or through an app. You’re able to adjust your risk tolerance or keep up to date on your portfolio easily.
3. Diverse
Since robo advisors use an algorithm to create the unique, customized portfolio, there is little to no guesswork in ensuring your portfolio is sufficiently diversified.
4. Freeing up mental energy for the investor
Apart from the initial questionnaire, utilizing robo advisors means the investor can be completely hands-off while still investing. This way, you won’t even have to do the research or decide which fund(s) to invest in. It already does it for you!
5. Efficient portfolio rebalancing
On a similar note, since robo advisors utilize an algorithm to create the diversified portfolio, they also automatically rebalance your portfolio as time goes on. Time is a major factor in deciding which investments to make; therefore, as time progresses, your asset allocation will automatically adjust if using a robo advisor. This allows for an efficient, hands-off approach when it comes to creating an investment portfolio. Ensuring the investor more time and mental energy to focus on other tasks instead.
Robo Advisor Cons
1. Limited Investment Options
Similar to different investment brokerages, there is often a limit to the selection of investments for robo-advisors. Therefore, limiting the ability to truly customize the investor’s portfolio.
2. Dependence on Technology
While the technology is quite impressive, robo-advisors are dependent on algorithms. As with all types of technology, they are not immune to glitches or errors.
3. Lack of Personalized Advice
Robo-advisors are great at generalizing and providing personalized portfolios to the general masses. However, robo-advisors can’t provide financial advice that’s tailored to every specific situation, especially ones that are very unique. In addition to that, there’s also a lack of limited human interaction. This means that there’s a lack of personal advice and guidance offered by the advisor.
5. Fees
At the end of the day, you can’t get away from fees if choosing a service. In this case, you’re choosing to have other people or systems to invest your money for you. Robo advisors typically make their money by charging fees for investing money on your behalf.
So what? It’s like 2%, how can that even make a difference? The thing is, 2% can stack up very quickly and seriously eat into your gains when you’re making anywhere between 5-10%. 2% of it could mean you get 3-8%. Depending on what account you’re using, you might be stuck paying taxes on the 3-8%, which will give you even less.
What robo advisors do you recommend?
Check out this post for a list of 5 best robo-advisor of 2022!
There you have it! This post was all about robo advisors, the robo advisor pros and cons, and a list of robo advisors that are recommended. Do you invest with robo advisors? Interested in investing for yourself? Check out this post on the best Vanguard index funds for Roth IRA.
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