Understanding the Benefits of Robo Advisors

Have you ever felt overwhelmed by the prospect of investing or managing your investments? Or do you just need more time in the day to handle everything, including your investments? If so, a robo-advisor may be a good tool for you.

Robo-advisors, which are automated investing programs, have popped up everywhere in recent years. Many investors or would-be investors are unsure about their value and how they work, but there are several good reasons to consider using a robo-advisor.

Automate the Investing Process

Investing automatically is more than just making automatic contributions from your paycheck or checking account to your investment account. A robo-advisor can also automatically rebalance your portfolio to make sure it stays diversified and on track to meet your goals.

Rather than remembering to check your portfolio on a regular basis, or taking time to meet with a human advisor on a regular basis to rebalance and make adjustments, a robo-advisor will do it automatically. And as you age, your robo-advisor can automatically adjust your holdings to match your preferred risk strategy.

Invest Smaller Amounts

Many human advisors require a certain level of investment before they will work with you to manage your portfolio, but you can work with a robo-advisor even if you have only a small amount to invest. Most robo-advisors have low or no account minimums.

Robo-advisors also allow you to invest small sums on a regular basis. For instance, some of the tools will allow you to invest as little as $5 at a time.

Save Money on Fees

When you rely on robotic financial advice rather than human financial advice, you don’t have to pay as much money in fees—so you have more funds available to invest.

Some robo-advisors are free, but most charge an annual management fee between .25 percent and .5 percent of your portfolio. Those fees are much cheaper than human financial advisors, who often charge 1 percent of your portfolio or more.

Many robo-advisors also waive per-transaction fees, so you can buy and sell stocks, bonds and mutual funds without incurring extra charges. In contrast, in-person advisors often charge a commission every time you buy or sell a holding.

Enjoy Reliable Returns

The algorithms behind robo-advisor programs have been proven to be effective in matching the performance of the indices they track. Most robo-advisors base their investment strategies and portfolios on techniques such as Modern Portfolio Theory and Efficient Market Hypothesis. Their ability to match market indices is impressive because most human-managed mutual funds are not able to do this on a consistent basis over time.

Launch a Valuable Investment Portfolio

Robo-advisors can be an especially good fit for new investors and for those working to build large portfolios. Leading mutual funds often require minimum investments of at least a few thousand dollars, and human financial advisors may require even more. For new or young investors who don’t have that much available to invest, a robo-advisor that allows smaller investments and charges low fees is a good way to start a portfolio.

While robo-advisors provide a valuable service, investing funds, diversifying your portfolio and rebalancing your portfolio, they can’t offer the personalized guidance that you may need as your portfolio grows. For instance, they can’t help you decide the best way to pay for your child’s college education or whether to take some money out of the market to invest in real estate in your hometown. A human advisor can discuss your goals, needs and ideas and provide informative guidance that a robot can’t manage.

A robo-advisor is helpful, but after you’ve built a portfolio of high six or seven figures, you may need the services of a human financial advisor to keep you moving toward your financial goals.