Robo advisors seem to be taking the investment world by storm. Advertisements for them seem to be everywhere. Podcasts, TV, and online are full of advertising for one of the new robo advisor startups. The returns, options, etc. they promise seem interesting, but what exactly are they?
We will run through exactly what a robo advisor is, some examples, and the differences between a regular advisor and a robo advisor. We want to give you the information you need to make an informed choice.
Robo advisors are platforms that use robots (algorithms) to help people invest their money. Depending on the platform, their robots could pick funds for you, automatically rebablance your portfolio, or even invest only in companies you care about. The idea is that using robots versus people can both save money in fees and possibly improve returns.
Most often when you first sign up for a robo advisor you will be asked a series of questions. These questions are to gauge how risky you are wanting to invest. From the assessment, they will then automatically select a blend of funds for you. The funds they pick should reflect your risk assessment, time to retirement, and overall asset allocation.
If this sounds complicated, it isn't for you. The nice thing about a robo advisor (and main benefit) is that you don't have to pick anything yourself. Their system algorithms will do the picking for you so you don't have to worry about it.
Many robo advisors offer other services, like automatic re-balancing, that can provide you even more benefit. Depending on the funds you choose and how often you contribute, it could improve your returns. Before choosing a robo advisor see what their offering is and if it would be beneficial for you. Be aware that sometimes the best services require a minimum threshold before you commit to any one platform.
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To get an idea of who is offering these services, we put together a list. This list does not compare any of the advisors to one another. Use it as a quick list to get familiar with the different players. Check the sites and see which one might be a fit for you.
Most robo advisors will manage up to a certain amount of money for you for free. The threshold before you get charged anything at a robo advisor is normally around $10,000. After that threshold the platform will start charging you somewhere between .25% - .5% on any money over the $10,000 threshold. To get an idea of what this fee structure looks like here is an example. Let's say our platform charges us .5% after $10,000 and we have $25,000 invested. Here is what the math would look like.
$25,000 - $10,000 = $15,000 that would get charged fees
$15,000 x .5% = $75
In our example you would get charged $75 a year for them to manage your money. This doesn't seem like much, but remember that even small percentages matter over time. Make sure that the fees won't eat into the growth of your money too much before making the leap.
I also wanted to specify that all numbers above are just examples. If you are looking for a robo advisor for yourself, please take a look at the fee structure on your own before making a decision.
The main difference between a robo advisor and a traditional account is not having to select or manage your investments. In a regular account you choose the funds, how much in each fund, etc. This is all taken care of for you with a robo advisor.
Some drawbacks of not choosing your specific funds are the loss of control and the added fees. If you are particular about the funds you want to be in a robo advisor might not be for you. You may end up paying more in fees than going through a low-fee fund like many off the ones offered in Vanguard as well. Knowing what type of investor you are will help you inform your decision about trying a robo advisor out or not.