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12 October 2016
Robo-advisors are web-based investment services used to provide professional investment management electronically via advanced computer algorithms and at much lower annual fees. They mainly target a young generation of investors who feel comfortable transacting business online and don’t want to interact with a financial advisor directly. Plus, you may create a decent asset allocation even with a relatively small amount of money in your pocket. Investing in the stock market has never been easier!
The basics of automated investing
Automated wealth management platforms are designed to take all investment activities off your hands. All you need to do is to complete a short questionnaire to assess your investing style and then transfer funds to your account. The platform will calculate your personal risk tolerance, build a diversified investment portfolio based on that parameter and then rebalance it on a regular basis using cash inflows and dividends.
Typically, robos rely on exchange-traded funds (ETFs) because of their low-cost and less risky approach to market exposure. ETFs are similar to mutual funds, but they trade on stock exchanges and make up a broader index, for example the S&P 500. Typically, ETFs cover several asset classes, including local and international stocks, dividend stocks, natural resources, REITs, treasury inflation-protected securities, emerging markets, and others.
Robo-advisors: pros and cons
Created to make online investing as easy as opening a bank account, robo-advisors are considerably less expensive than traditional fund management services or financial advisors. You can check in advance how much money you will need to pay for their advisory services – generally, less than 1% per year. On the contrary, classic investment brokers charge 1% – 3% to manage your money.
In addition, traditional financial advisors are focusing on wealthy clients having $200,000- $2 million in their portfolio. Modern online investment services are democratizing the money management industry by lowering minimum balance requirements: they will provide you sound financial advice and portfolio management even if you have $500 in your account.
On the other hand, web-based advisors won’t give you an opportunity to customize your investment portfolio and choose assets personally. The platform will invest your money according to its inner algorithms, and you can’t call a programmer and override the platform’s decision as you want. Plus, your investments won’t be insured by the Federal Deposit Insurance Corporation (FDIC).
Choosing a robo-advisor
Due to the increasing popularity of online investing, you can constantly see new services appearing on the market. Besides comparing their fees and features, don’t forget to check their registration: any money-management firm or brokerage should be registered with the SEC. You need to visit their site to check information about your robo-advisor before funding your account.
Here are several popular offers available on the market to take into consideration:
Headquartered in New York, Betterment is one of the major players in the investment advisory services industry. The company provides personalized financial advice and invests money in up to 12 different asset classes to maximize portfolio return and help clients meet their end goals. You can open an account with just $10 – there is no minimum balance requirement.
Betterment uses a three-level annual fee system based on the account balance. If you have up to $10K in your account, you will need to pay 0.35% per year. Plus, in this case it is also necessary to make auto-deposits for at least $100 per month, otherwise your wealth management fee will be increased to $3 per month. If your account balance is up to $100K, you will need to pay 0.25% per year, over that amount – 0.15% per year.
Wealthfront is an automated software-based investment platform using largely the same business model as Betterment. When new investors sign up online or via a phone app, they need to answer a series of questions designed to determine their risk tolerance and build a portfolio of exchange-traded funds in 11 asset classes based on their goals, like retirement or college education.
Wealthfront offers lucrative terms for beginner investors: they don’t charge any money management fees on the first $10,000 that clients want to invest. After you pass that threshold, you will be charged a flat advisory fee of 0.25% of the value of your portfolio. The minimum balance required to open and maintain a Wealthfront account is $500.
Vanguard Personal Advisor Services provides smart investment advice and advanced money management tools for less than traditional financial planners typically charge – their annual fee is 0.30%. The company offers dozens of low-cost mutual funds and ETFs to build a diversified portfolio based on clients’ risk tolerance and investment objectives.
The main difference of Vanguard from above-mentioned Betterment and Wealthfront is in their hybrid investment approach: the company provides robo-advice along with a live personal planner who will review your account periodically. On the other hand, Vanguard requires having at least $50,000 to open an account, so this solution is not suitable for beginner investors.
The investment advisory services industry hasn’t escaped the impact of the new technologies and approaches that are disrupting the financial industry. There’s no doubt that robos are making investing easier and more accessible even for newbies. However, taking into consideration their low cost model and easy-to-use technology, don’t forget about possible security breaches and potential losses – no investment is risk free.
Exciting articles several times a month