Is robo-advisor right for you?

Online financial advisors, called robo-advisors, can be found in many financial institutions, such as Fidelity Institutional, Betterment, Charles Schwab Corp., etc. In fact, almost every financial company has its own robo-advisor or cooperates with it.

Is robo-advisor right for you? As with most questions in the field of financial planning, the answer is “it depends.” Here are some ideas to consider.

Key points

  • Robo-advisors are low-cost automated investment platforms that use algorithmic execution to manage funds.
  • These platforms are best for new investors or beginners who may not have a lot of money but still want to start contributing to their portfolio.
  • Using robo-advisors, you can get an optimized long-term investment portfolio.
  • The robo-advisor will run errands for you, but you sacrifice your ability to make investment choices and some human influences.
  • Not all robo-advisors are the same. Some cater to special investor groups. For example, Ellevest promotes itself as a female-run company designed for women.

What level of advice do you need?

The first thing you need to consider is what level of advice and expertise is needed to manage your funds? If you have a seven-figure investment portfolio and need guidance in complex areas such as tax planning, estate planning, and stock option exercises, then robo-advisors may not be for you. Establishing relationships with more traditional financial advisors can better serve such people.

For millennials and other moderate investment portfolios who may need some asset allocation advice and some basic financial planning help, many of today’s online advisors may meet the requirements. In most cases, robo-advisors build portfolios that follow passive strategies (such as indexing). They are relatively simple investment strategies that use ETFs to optimize the risk and expected return of the investment portfolio.

Beginners and those who like to set it up and forget about it are most likely to appreciate the automation brought by the robo-advisor. Since robo-advisors are low in cost and do not require a considerable minimum amount to open an account, they are attractive to people who usually cannot afford traditional financial advisors.

With robo-advisors, you will not be able to choose stocks or strategies. The robo-advisor makes all the decisions for you. Therefore, if you are the kind of person who may not have a lot of funds to invest but wants more autonomy when making investment choices, you may want to switch to an autonomous online trading platform, such as Robinhood, E*Trade, or TD Ameritrade-all these companies now offer free trading on most stocks and ETFs.

All robo-advisors are different

Just as all traditional financial advisors are different, so are online advisors. In the world of traditional financial consultants, there are differences in their professional fields, remuneration methods, and the types of clients they work with. The same is true in the field of robo-advisors.

For example, Personal Capital, which sees itself as a “digital asset management service” rather than a robo-advisor, provides online services for higher-end markets and targets investors with a portfolio of $100,000 and above. On the other hand, Acorns can get started with just $5 and provides some tools, such as rounding up the change you bought to invest in your portfolio.

Some robo-advisors only allow broad index investment. Others are increasingly adding socially responsible investment portfolios to clients who are aware of these issues. Others, such as M1 Finance, allow users to customize their investment portfolio.

Convenience and accessibility

One of the main advantages of online consultants is the ease of working with them and the ease of accessing their services. This generation is very accustomed to buying goods and services online, so why not provide financial advice?

Online consultants can be accessed 24/7, which may attract a wide range of clients. Since everyone is busy, this level of accessibility may be the motivation for some people to get the financial help they need.

At the same time, many robo-advisors are fully automated with limited human participation. Although some people do have human advisors on site to make calls and customer questions, most of these advisors are not actually researching your portfolio or investment choices-these are all done by algorithms. Instead, these human interlocutors control your emotions and act more like coaches or therapists than financial advisors.

Understand the content behind the suggestion

Just because the online consultant is accessible and the price is reasonable does not mean that the advice is good. Anyone who wants to use an online advisor to do their homework first and understand how to generate investment advice is responsible.

Most robo-advisors use one algorithm or another when making investment recommendations. Although you may not be a mathematician or investment expert, at least, ask questions and read their investment methods to see if it makes sense to you.

Most robo-advisors follow an investment strategy based on Modern Portfolio Theory (MPT) in some form, and robo-advisor investment strategies can usually be found by searching their website or from FINRA documents. MPT is a method of optimizing index investment portfolios. It determines the best combination of asset class weights to generate the highest expected return for a specific amount of risk.

Financial advisors can help you manage your entire financial life. Some financial advisors can help with many aspects of finances and will not work outside of portfolio management.

Does it have to be “or”?

It seems that as companies such as Schwab and Fidelity enter the field, some of the best aspects of online consultants will not overlap with the service offerings of traditional physical consultants for long. For several years, we have been seeing some of them through online customer portals and other features on many financial advisory websites.

In the future, we may see some changes in more traditional financial advisors providing online advisory services to attract young clients. The idea behind this may be that these young investors will grow into more outstanding clients who need, want, and can afford more traditional full-service advice.

Cooperating with clients online and remotely also has advantages for traditional financial advisors. Although building and maintaining their website will definitely incur costs, eliminating the physical presence will save costs, and it is conceivable to have the opportunity to reach a wider range of potential customers.

What happens during market volatility?

When the market fluctuates, some investors may be worried. As a result, they reacted differently, from calling their financial advisor to change their portfolio to leaving everything alone.

Rob-advisors have performed well as a long-term investment tool, allowing investors to choose a portfolio based on a set of personalized financial goals, and investment professionals can rebalance the portfolio through robo-advisor. When the market fluctuates, sentiment may be high. However, robo-advisors make disciplined decisions that are not driven by emotions.

For example, during the market volatility in 2020, robo-advisors persevered in a stressful market. According to research by Backend Benchmark financial advisors, “many robo-advisors with unique strategies or holdings perform better in terms of performance above/below standardized benchmarks.”

For some people, a personal advisor who can talk to you about the market and your options may be a better choice for nervous investors who need a more customized approach to their portfolio. However, robo-advisors are prepared to perform well during market volatility, but investors who need personalized one-to-one services may feel better working with human advisors.

What does a financial advisor do?

Financial advisors help people manage their finances. They can manage investment portfolios on behalf of clients, execute financial plans, and help clients achieve long-term financial goals. Clients often meet with their consultants regularly to discuss any changes in their financial goals, concerns about the market, and set any new goals that arise. Financial advisers can be brokers or investment advisers, or insurance agents, and they also belong to the category of financial advisers.

What is the difference between a financial consultant and a financial planner

Financial consultants are financial planners, and certified financial planners (CFPs) are specific types of consultants. Certified financial planners usually focus on a specific goal, such as saving for retirement or settlement of estates. One big difference between the two is that certified financial planners must comply with fiduciary standards. According to the law, they must act in the best interests of their clients. Registered financial advisors may be subject to fiduciary standards, but not all financial advisors (such as brokers) must put the best interests of their clients above their own interests.

How much does the online consultant cost?

The cost of robo-advisors is lower than that of face-to-face consultants. They usually charge low fees, and their services are often advertised as an affordable way to invest in the market. Most robo-advisors charge a fee. Manage 25% of total assets.

Can I trust an online financial advisor?

Yes. Robo-advisors most often have connections with well-known financial institutions, such as Charles Schwab, Betterment, TD Ameritrade, etc.

How do I find the best financial advisor?

There are several ways to find a financial advisor. Start an online search, ask your peers or contact the National Association of Personal Financial Advisors. In addition, if you have a retirement account related to your work, you may need to investigate their services.

The real question to ask is, “How do I find the most suitable financial adviser for me?” If you want to take a low-cost, non-interference approach to your investment, then a robo-advisor may be a good choice. If you have millions of dollars in assets and a complicated financial situation, you may want to stick to traditional face-to-face financial advisors to help you manage your funds and investments.

Bottom line

All businesses are affected by technological progress and overall changes, and financial services businesses are no exception. Most of the work of financial advisors relies heavily on technology, so the evolution to online advisors is not surprising.

Is an online consultant right for you? For many people, the answer may be “yes”, especially for young, less affluent investors, who may not be served by the financial services industry.

As robo-advisors continue to develop within large financial institutions, they may continue to provide better choices for investors and savvy financial advisors.


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