Roboadvisors promise much, but you should know their limitations.
With robots doing everything from stocking warehouse shelves to helping surgeons perform precision surgery, it’s no surprise that something called a “roboadvisor” has entered the arena of managing personal finances.
Despite the growing popularity of these tools, their name may be slightly misleading. Roboadvisors don’t make use of physical robots. Rather, they are a form of automated investing based on algorithms unique to individual developers.
According to their promoters, roboadvisors offer a viable option for investors who would prefer to leave managing their portfolios up to someone—or something—else. The choice for some gets down to either a live financial advisor or a roboadvisor.
“Either way, it’s misleading to cast a definitive vote for either flesh-and- blood or fresh-and-tech,” says Lou Carlozo, contributing editor to Money
Under 30. “Rather, both human and roboadvisors have their own unique set of advantages; it just depends on your circumstances. Some individual advisors make mistakes, and robos don’t particularly juice up your learning curve, even if they can make you money.”
“But if you have a strong opinion, we can’t blame you. Personal preferences play a major role in all the important areas of life,” Carlozo says.
Here are some key factors to consider when making a choice between automated investing and working with a live financial advisor:
Roboadvisors are the clear winners when it comes to price. Major roboadvisor suppliers such as Wealthfront.com and Betterment.com have clear and transparent pricing structures right on their websites.
Conversely, there is no standard pricing structure for live financial advisors, and some can be unclear as to exactly how they arrive at their charges.
“In general, roboadvisors charge lower fees than live advisors,” says Carlozo. He notes that some advisors may charge fees higher than what are generally regarded as the norm. For example, they might charge 1.5 percent for managing equities versus 0.5 percent for bonds, arguing that equities are more complex investments. Then, later, when you notice your portfolio is heavily tilted toward stocks it should be no surprise why.
Automated and easy learning “Robos will offer you rudimentary guidance on how certain investment vehicles work,” says Carlozo. “You’ll also get exposure to investment principles through learning how they approach the challenge of making your money grow. It probably won’t be nuanced, and ideally you’ll want to supplement that info with what you learn from other sources.”
Roboadvisors allow you to dip your toes into the investment waters with minimal risk. Some roboadvisor sites allow you to start investing with as little as 1 dollar. A human financial advisor would not take you on for that amount.
Making it personal
If you’d rather not spend your time poring over financial data and agonizing over what to buy or sell, a roboadvisor may be the right choice for you.
“On the other hand, because robos automate your investing, you could easily get lulled into thinking that making money is as easy as taking a selfie,” says Carlozo. “But if it were really that effortless, wouldn’t everyone be doing it?”
The financial risk associated with automated investing is the same as with any other form of investing, and maybe more so. Risk is ultimately unavoidable.
Which route is likely to produce the most profitable returns for you over the long run? Roboadvisors are designed to accommodate the needs of a wide range of people. That’s probably why portfolios managed by them tend to be invested in conservative products. While this may make them less vulnerable to stock market volatility, the nature of conservative investing can limit your potential for profit.
Live advisors can’t guarantee a better return than automated investing. However, they can gain insight into your particular situation and make adjustments suited to your needs and objectives.
When worse comes to worst
Ups and downs are inevitable in the stock market. While minor market corrections are easy to accept, human nature being what it is, many of us tend to panic in the face of a major market correction.
“If you start to move your money around in panicky ways, a roboadvisor isn’t going to stop you,” Carlozo says. “That’s an individual advisor’s job, and most have likely seen enough market volatility to talk you off the ledge.”
Automated investment services promise to make investing easy, inexpensive, and even fun. Both human- assisted investing and the use of roboadvisors offer advantages and disadvantages. All things considered, when it comes to results in good markets or bad, it would seem that live advisors claim the advantage.
William J. Lynott is a freelance writer whose work appears regularly in leading trade publications and newspapers as well as consumer magazines including Reader’s Digest and Family Circle. He can be reached at firstname.lastname@example.org or through blynott.com.