What Is A Robo- advisor? How Wealthfront, Betterment, And Others Manage Your Money
The first steps in investing are not as scary as you might think. You don’t need any financial experience, you don’t need thousands of dollars, nor do you have to manually select each stock and secure your cash purchases. When you sign up for Robo-advisor, all you need is a few dollars and answers a few simple questions.
To find out if Robo-advisor is right for you, here is everything you need to know about this automated investment service.
If you want to invest your money but don’t know what to invest in first, turn to Robo-advisor.
What is a Robo-advisor?
Robo-advisor is an automated financial advisor and investment platform. The system uses software algorithms to create and manage your portfolio in a way that you don’t have to. When you sign up for Robo-advisors, you answer a variety of questions, such as:
- How old are you?
- When are you planning to retire?
- What kind of investor are you (conservative or aggressive)?
Robo Advisors use automation and software to build and manage your portfolio rather than hiring a financial professional.
While some Robo advisors have minimum account requirements to get started, this is usually a minor hindrance to achieving. For example, you may only need $ 500 to get started. Other people do not have a minimum account. This means you can invest just a few extra dollars in your bank account.
What is the difference between Robo-advisor and traditional brokerage?
A brokerage account is a place where you can manage your investments. Robo advisors allow your computer to do it for you based on your style and preferences. Most Robo-advisors usually charge a low flat fee, around 0.25% per annum of your total investment. Online brokers usually charge more or more.
Robo advisors are great for making practical investments. They use your preferences and style to decide how to invest your money and then manage it for you and provide regular compensation. Sometimes, as a self-managed investor, you can’t make this a priority through mediation.
Robo advisors typically invest in index funds and exchange-traded funds to keep costs down. You can invest in many types of securities with a broker, but you will have to pay a little more to get the privilege.
Pros and cons of Robo-advisors
If you know managing your money is important but aren’t sure where to start, a Robo-advisor is a good introduction to investing. But they’re not always the best choice for everyone.
- Instant diversification. While brokerage accounts let you select your stocks and other securities, there’s a chance you could get too much of a good thing — which means you could also face a huge loss. Robo-advisors diversify your portfolio through index funds and ETFs so that in case you do have a loss, it’s not significant. Thanks to rebalancing, you’ll also drop investments that aren’t doing well.
- Minimum investing requirements. Depending on the Robo-advisor you choose, you might not have an account minimum to get started. If you do need something to get started, it’s usually around $500 — sometimes less.
- Low fees. Since Robo-advisors use fewer humans than brokerage firms, they can charge lower fees.
- Easy to use. Most Robo-advisors have simple interfaces and apps to look at your investments and add funds.
- Socially responsible investing. Some Robo-advisors allow you to choose investments that align with your values without charging a premium.
- Limited human interaction. While Robo-advisors have solid customer service, you’re limited in the help you receive. You don’t always get a chance for expert advice. If a Robo-advisor does offer the chance to talk to a financial professional, it tends to come with an extra cost. Most Robo-advisors are online-only, which means you don’t have the option to visit a branch if you need to talk to someone about your account.
- Few securities. If you’re looking to broaden your investment choices, you might not have it with a Robo-advisor. Most of them invest their money in ETFs, which is great for diversification. But if you’re looking to get into different kinds of securities, you might want to look elsewhere.
- Not great for everyone. Robo-advisors are a good choice for most people, but not always the right choice for everyone. Depending on your investment strategy, retirement plan, assets, and where you want your money to go, it might not work for you.
Where to get started
As you’re browsing through Robo-advisors to start investing, ask yourself a few questions before deciding.
- What are the minimum requirements? Do you need to make a large contribution to get started or maintain a minimum account balance? The lower the threshold to qualify, the easier it’ll be to get started.
- What are the fees like? Some firms have a flat annual fee but do the math: a 0.25% fee looks a lot different for a $10,000 investment compared with $100,000. Make sure you’re alright with what you’re forking over.
- Do you have a chance to talk to a human? Many advisors select portfolios based on answers from a set questionnaire, but other circumstances could influence how you invest your money. If you need to talk to someone about your unique situation, does your potential Robo-advisor offer personal financial advice?
There are some leading Robo-advisors in the game, but not all of them have the same requirements and offers. Here are a few.
- Ellevest: No account minimum; monthly membership fees ranges from $1 to $9; specifically designed for women
- Wealthfront: $500 account minimum; 0.25% annual fee; great for most investors
- Betterment: No account minimum; 0.25% annual fee; opportunity for professional financial advice for an extra cost
- Ally: $100 account minimum; no fees; good for current Ally customers
- Acorns: No account minimum; $1-$3 per month to use; invests your spare change
Whichever Robo-advisor you choose, starting and maintaining an investment portfolio should be easy. Remember to do your homework first to determine the fees to pay and find the best Robo-advisors to help you meet your investment goals.
Disclaimer: The information contained in this article, including program features, program fees, and available credit cards for the program, is subject to change from time to time and is provided without warranty. When evaluating offers, check the website of the credit card provider and read the terms and conditions for the latest offers and information.