What is a robo-advisor? How Wealthfront, Betterment and others manage your money

What is a robo-advisor? How Wealthfront, Betterment and others manage your money

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Getting started with investing isn’t as intimidating as you think. You don’t need a background in finance, you don’t need thousands of dollars, nor do you need to hand-pick every stock and security your money buys. In fact, when you sign up for a robo-advisor, all you need is a few dollars and to answer some simple questions. 

To help you know if a robo-advisor is right for you, here’s everything you need to know about these automated investing services.

What is a robo-advisor?

A robo-advisor is an automated financial advisor and investment platform. The system uses a software algorithm to build and manage your portfolio so you don’t have to. When you sign up for a robo-advisor, you’ll answer a few questions, such as:

  • How old are you?
  • When do you plan to retire?
  • What type of investor are you (conservative versus aggressive)?

Robo-advisors use automation and software to craft and manage your portfolio, rather than use a financial expert.

While some robo-advisors have minimum account requirements to start, it’s usually a low barrier to meet. For instance, you might only need $500 to get started. Others don’t have an account minimum, which means you can start investing with just a few extra dollars in your bank account.

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What’s the difference between a robo-advisor and a traditional brokerage?

A brokerage account is a place for you to manage your investments yourself. Robo-advisors let a computer manage it for you based on your style and preferences. Most robo-advisors usually charge a low, flat fee, around 0.25% a year on your total investments. Online brokerages tend to charge more or higher fees. 

Robo-advisors are great for hands-off investing. They use your preference and style to select how to invest your money and then manage it for you, offering regular rebalancing as well. Sometimes as a self-directed investor through a brokerage, you might not make this a priority.

Robo-advisors tend to invest in index funds and exchange-traded funds to keep costs low. Brokerages let you invest in many different types of securities, but you’ll have to pay a little more for the privilege.

Read more: 5 investment accounts everyone should have

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.

Pros:

  • Instant diversification. While brokerage accounts let you select your own 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.

Cons:

  • 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 your 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

Regardless of which robo-advisor you choose, it should be easy to get started and maintain an investment portfolio. Just be sure to do your homework first to determine the fees you’ll be paying and find the best robo-advisor to help you reach your investment goals.

Disclaimer: The information included in this article, including program features, program fees, and credits available through credit cards to apply to such programs, may change from time-to-time and are presented without warranty. When evaluating offers, please check the credit card provider’s website and review its terms and conditions for the most current offers and information. 

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Source: Cnet News
Keyword: What is a robo-advisor? How Wealthfront, Betterment and others manage your money

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