What Is a Robo-Advisor?
A robo-advisor is an intelligent investment software that utilizes computer algorithms to determine how to invest a clients money.
Robo-advisor is simply a much cooler and catchier term for automated investment services.
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How Do Robo-Advisors Work?
This technology utilizes passive indexing strategies, optimized with modern portfolio theory (MPT).
Each companys algorithms will vary and are, obviously, proprietary.
Luckily, getting matched with a helpful robo-advisor ismucheasier than matching your soulmate on Tinder.
Not sure where to start your search?
Here are ourtop robo-advisors for 2022.
How Much Do Robo-Advisors Cost?
Were talking less than a penny on the dollar.
Thats less than youd probably pay for an actual human advisor.
For example, lets say youve got a $50,000 account balance.
A 0.25% annual fee is just $125.
Thats right: $125 for something (er, someone… robots are people too, yeah?)
to manage $50,000 in assets and grow that money for you without you having to lift a finger.
And actually, therearefree robo-advisor options, like SoFi Automated Investing.
What Do Robo-Advisors Do?
The full scope of robo-advisors portfolio management services and features can be broad and varies from company to company.
This can be helpful in building a nest egg for your retirement.
An important component of robo-advisors is that they offer portfolio rebalancing.
Note: This only applies to if you have a taxable account.
Most robo-advisors offer a wealth of financial planning tools to help you make decisions about your future.
Retirement calculators are a common tool.
Many robo-advisorsdohave real people whom you talk to.
However, this is typically an additional fee.
As such, they are typically priced in between the two options.
Pros and Cons of Robo-Advisors
Thus far, robo-advisors sound like a pretty sweet deal, right?
And rightly so: Therearea lot of benefits to robo-advisors.
But they also have their pitfalls.
But of course, therearedownsides to using a robo-advisor.
Chief among them:
Should I Use a Robo-Advisor?
Robo-advisors are excellent tools for entry-level investors.
), you are better off working with a traditional financial advisor for your portfolio management.
Robo-advisor service offerings typically include basic investment (IRAs, SEPs, etc.
), financial portfolio rebalancing, tax-loss harvesting (reducing capital gains tax liability) and financial planning resources.
Companies typically charge a fixed percentage of assets under management.
This fee is much lower than what traditional financial professionals charge.
In addition to the flat percentage, robo-advisors look to other revenue streams to increase profitability.
Timothy Moore covers bank accounts for The Penny Hoarder from his home base in Cincinnati.
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