What is a Robo-Advisor? | The bank rate
Robo-advisers have become extremely popular over the past decade, and with good reason. They automate the investment process for you, making it easier to invest in a diversified portfolio of assets, and they charge much less than a typical financial advisor. It’s no wonder, then, that many investors have turned to them and that robo-advisers are now managing hundreds of billions of dollars.
Here’s what a robot advisor does and who the main players are, including a few lurking in some of the big financial institutions you already know.
What a robot-advisor does
A robo-advisor is really just a fancy term for a financial advisor who automates the process of investing and financial planning. A robo-advisor uses the planning tools a human advisor would use and builds a portfolio based on your risk tolerance and when you need the money.
But a robo-advisor does things that would be tedious, expensive, or impossible for a human advisor to do. For example, robots automate the process of harvest of tax losses to maximize taxable losses, even on a daily basis. It can also rebalance portfolios so that your asset allocation stay on track. Other bots can provide other services, such as advanced goal planning, including making your investments more conservative the closer you get to your goal.
Like a good human advisor, a robot advisor tailors your investments to your needs. If you have a long-term goal like retirement, the robo-advisor will tend to choose aggressive investments such as equity funds, who have a history of high returns. If you have a short term goal, the robot will likely select more conservative investments, like bond funds or even cash.
To invest your portfolio, a robo-advisor generally uses exchange-traded funds (ETF) that have certain characteristics, such as what they are invested in (stocks, bonds, cash or some mixture), or a certain level of volatility, including very little volatility at all.
ETFs charge a expense ratio, which are fees paid to the fund management company based on how much you have in the fund. A typical expense ratio could be 0.05% to 0.35% per year, or $ 5 to $ 35 for every $ 10,000 invested. You pay these fees no matter which robot advisor you select, but some robots offer funds with lower fees, so check what they charge.
With a robo-advisor, clients simply deposit money into the account and the robo-advisor invests it according to the investment plan that has been established. The client can access the robo-advisor account at any time of the day to see the current market value of the account and how it is invested.
The biggest advantages of a robo-advisor
A robot advisor really shines in a few key areas, especially where its automation gives it a real advantage over human advisers. Robo-advisers can be great at tedious or stereotypical tasks, such as designing a portfolio based on your goals. (Human advisers excel at the most sophisticated and less routine tasks – here’s how to decide what’s best for you.)
As mentioned above, robo-advisers are distinguished by features that would be just too tedious for a human to handle, such as collecting tax losses on a daily basis. They also make it easier to rebalance a portfolio and automate and simplify the process of investing a client’s money.
Investing with a robot advisor is extremely easy, as clients can simply send money and the robot takes care of the rest. Investors have nothing else to do and they can always check the account or even adjust it, if necessary, when their financial situation changes, for example.
Robo-advisers tend to be a lot cheaper than traditional financial advisers because everything is automated. Robots typically charge a percentage of the funds you’ve invested with them, and that fee is often around 0.25% per year, or around $ 25 for every $ 10,000 invested. This is a significant difference from the typical 1% charged by human advisers.
Some bots charge more, but offer higher levels of service, such as access to a human advisor. We don’t even charge any fees, in part because it compensates by investing you in its funds.
Robo-advisers have grown a lot over the past decade, and many independent players – those that only offer robo-advisers – are the most well-known. However, other well-known financial players may also offer a robo-advisor as part of their total offering, so don’t assume independent players such as Improvement, Wealthfront and Ellevest are the only games in town.
Betterment is one of the largest independent players, and it requires no minimum account for the entry-level digital account, which charges a 0.25% management fee. If you’re looking for more access to Certified Financial Planners, you can upgrade to Betterment Premium for a 0.4% fee, but you’ll need to put at least $ 100,000 into the account.
Wealthfront requires a minimum account of $ 500, but you’ll be able to manage the first $ 5,000 in your account for free, skipping the bot’s usual 0.25% management fee. Wealthfront offers low expense ratios on its ETFs, no additional account fees and goal-oriented planning.
Ellevest is a newer player and while it is aimed specifically at women (as traditional planning may not meet their needs) it is suitable for anyone looking for client-focused advice. It offers subscriptions at $ 1, $ 5, and $ 9 per month, offering a range of services, rather than fees based on your assets under management. Company founder Sallie Krawcheck has been a force in the financial world trying to provide women with services that match their specific circumstances.
Schwab Smart Wallets
You might hear “Charles SchwabAnd think “discount broker”, but this financial powerhouse also manages the second largest robo-advisor. While you need more money than other bots to get started – a hefty sum of $ 5,000 – you won’t pay any management fees. You can also upgrade to the Premium plan, which requires a deposit of $ 25,000, a start-up fee of $ 300, and a monthly fee of $ 30. But you will also have unlimited individual access to a Certified Financial Planner.
Vanguard Personal Advisory Services
And the best robo-advisor in terms of assets under management is Avant-garde, which is best known for its range of low cost funds. But he also manages the personal advisor services and now the digital advisor. It takes a little money to start investing with Personal Advisor – at least $ 50,000 – and you’ll pay a tiered fee based on your assets, starting at 0.3% and decreasing to 0.05% for accounts over of $ 25 million. Meanwhile, the new digital advisor can also manage your investments with a lower initial deposit of $ 3,000 and an annual fee of $ 4.50 for every $ 3,000 invested.
How to open a robo-advisor account
It’s surprisingly easy to open an account with a robot advisor, and since they’re all web-based, you can get started any time of the day or night. You’ll need some basic personal and financial information like your Social Security number and bank account details, but you can usually open the account in 15 minutes or less.
Plus, you often don’t even need the money to get started with many robo-advisers, although some may require you to deposit a nominal amount of $ 5 to get started. However, others may require $ 100 or even $ 500 or more to start, but if that is a problem for you, you have options to avoid an initial deposit.
Once you have opened the account, the robo-advisor will use a questionnaire to assess your risk tolerance and time horizon (i.e. when you need the money.) From there, it will design a wallet using ETF that meets your parameters. The robo-advisor can ask further questions about your financial goals to further tailor your portfolio to your specific needs and circumstances.
At the end of the line
While you may be hesitant to entrust your money to a computer application, robot advisers are actually quite sophisticated. In fact, your traditional human advisor is probably using it to build and manage your portfolio anyway. Robo-advisers provide many attractive services at a reasonable cost and their ease of use makes them particularly attractive to new investors wishing to get started.