Financial transactions are increasingly becoming automated. The latest in financial automation are roboadvisors. These online investment platforms use a computer algorithm to automate asset allocation, according to Freedom Debt Relief.
To get started with a roboadvisor, you answer a few questions online or via the smartphone app. The computer program analyzes your answers to the questions then recommends low-fee exchange-traded funds based on your time horizon, investment goals, and risk tolerance.
The roboadvisor’s expertise doesn’t stop there, says Freedom Debt Relief. The advisors monitor your investments and rebalance throughout the year, often in a way to minimize the amount of taxes you owe.
While there are some roboadvisors that are strictly computer-based, there are others that offer a human financial advisor to talk to in addition to the assistance the roboadvisor provides. For example, many of the larger investment firms have – Charles Schwab, TD Ameritrade, and E*Trade – have roboadvisors and offer human financial advisors on an as-needed basis.
Who Should Use a Roboadvisor?
A roboadvisor is a great option for younger, lower-net-worth individuals who may not have the minimum asset requirements to work with a financial investment advisor. Freedom Debt Relief suggests those with simple portfolios and who are new to investing can also benefit from using a roboadvisor.
When you’re choosing a roboadvisor, consider the minimum deposit amount. You may able to start out with nothing, while others have a minimum amount you must begin with.
Pay close attention to fees you might pay, particularly hidden costs that aren’t laid out in plain sight. For example, if your funds are being invested in funds, there may be additional fees associated. Compare the cost of using a roboadvisor to that of using a traditional financial advisor. Make sure the cost-savings is worth it.
Does the roboadvisor help your asset allocation? You should have a well-diversified portfolio to hedge against risk. The roboadvisor can help you with asset allocation based on your age and risk aversion. Make sure you’re ok with not having a human to walk you through your portfolio, recommends Freedom Debt Relief.
Why Should You Avoid a Roboadvisor?
If you have most of your money in an employer-sponsored retirement plan, you would not want to go with a roboadvisor. 401(k)s are management by an investment trustee and a roboadvisor won’t be useful to you.
Keep in mind your needs might change over time. You can move your funds to another firm or, if you’ve chosen a roboadvisor that offers some human interaction, you can get personalized advice from a financial advisor.
You should probably avoid a roboadvisor if you want to have control over your investments, advises Freedom Debt Relief. Your portfolio is assigned to you based on the risk tolerance determined by your answers to the questionnaire. You don’t have the ability to make adjustments to your portfolio.
If you don’t agree with the investment allocation assigned to you, you may not want to use the roboadvisor for the same reason listed above.
With more financial transactions being conducted electronically, the use of roboadvisors is likely to rise. Those who want a simple way to get started investing would likely benefit from the use of a roboadvisor.
