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Robo Advisors- What They Are and How They Work

A robo-advisor, also known as an online investor or an automated investing software is designed to use computer algorithms to build as well as manage investing portfolios. Robo-advisors offers services that range from tax optimization to automated rebalancing, and they require zero to minimal human supervision. However, most of them do have human financial advisors available anytime the investors have any questions.

How Much Do Robo Advisors Cost?

Compared to human financial advisors, robo advisors cost just a fraction of the charges. Most companies charge a low percent ranging from 0.32% to 0.89%. Of course, this will highly depend on the company. Some robo advisors charge as low as 0.5% or even less.

Are Robo Advisors Good For You?

Anyone can use a robo advisor. However, there are certain aspects you need to consider before you make a decision.

The type of account

Consider what type of account the robo advisor can manage. Most robo advisors manage both taxable and retirement accounts, while others manage trust. You might even find a robo advisor that can manage your 401k.

Minimum requirements

Different robo advisors require as different minimum investing requirement. Some require as much as $10,000 or more. However, most require a minimum of $500 and less.

Portfolio recommendations

During the sign up process with a robo advisor, you will probably have to answer a questionnaire to assess your goals, risk tolerance, and investing preferences. Most robo-advisors offer about 10 portfolio choices that range from aggressive to conservative. The robo advisor recommends a portfolio for you based on the questionnaire answers. Of course, you have the option to choose whatever portfolio you want.

Time to your end-goal

If your goal is to purchase a house in three years, or to retire in 5 years, the advisor will direct you towards the conservative portfolio end, If you intend to retire in the next 30 years though, the robo advisor will direct you to the aggressive portfolio end. It is possible to have multiple accounts with different time goals if you would like that.

Fund selection

Most robo advisors build the portfolios out of index funds and EFTs. What you do is pay the fees charged by the funds, as well as the investor fees.

Benefits of Using Robo Advisors

One of the biggest advantages of using a robo advisor is that you can avoid making huge investment mistakes. Most investors tend to make emotional decisions during market highs and lows, basing those decisions on gut feelings. These feelings tend to make mistakes software do not make.

Reduced stress is the next advantage because as soon as you open your robo advisors account, the software automates the entire process. You won’t have to worry about making portfolio changes, investing more or anything else. The software does everything for you.

Conclusion

Now you know what robo advisors are and you have enough information to decide if using one is a good idea. If you choose to, ensure that you do your research and use the best software, which will result to better outcomes.

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