Robo-advisors have grown in popularity in the last years and the number of the consumers who have started using them to invest their money, has increased significantly. They are a particular class of financial advisors, that provide financial advice or investment management online using algorithms to automatically allocate, manage and optimize clients’ assets and in which the human intervention is minimal.
To obtain information about the clients’ degree of risk-aversion, financial status, and desired return on investment, robo-advisors use online questionnaires and after this process, they allocate the client’s money in investments products. Clients can choose between offerings with passive or active asset allocation techniques. The portfolios that robo-advisors offer to investors are typically ETF. However, some offer pure equity portfolios.
Fees of using robo-advisors
Some robo-advisors have no account minimums, meaning the client could open an account for only 1 USD if he or she wanted, so everyone can invest using them. Most of them charge an advisory fee as a percentage of the investor’s account value. The average advisory fee is 0.40%. So, for example, if an investor’s account is valued at 1,000 USD and the advisory fee is 0.40%, the fee would come to 4 USD. This advisory fee is in addition to the required expense fee for owning a fund, which an investor pays regardless of where he or she invests. Many robo-advisors only charge an advisory fee, but some others may also c Fees can easily eat into an investor’s returns, particularly if the investor has an account with a lower monetary value, so it is important take in consideration the costs before investing.
Advantages of using robo-advisors
Using the robo-advisors to invest the money have many advantages. Let’s see now which are some of their benefits:
- Getting started with them is simple and fast, where account setup generally involves a straightforward set of questions designed to assess your financial situation, goals, and risk tolerance.
- They are consistently and quickly accessible online or through apps.
- The fees are lower, compared to the costs of traditional financial advisors.
- They include tax harvesting automatically or make it simple to opt-in.
- They offer more frequent portfolio rebalancing.
- They often use Nobel Prize-Winning Investment Models.
- They can help to take emotion out of the investments.
These are not the only benefits of robo-advisors, but these are some of the most important advantages.
Disadvantages of using robo-advisors
Using the robo-advisors to invest the money have many disadvantages. Let’s see now which are some of their disadvantages:
- They aren’t 100% personalized and you can’t choose your own investments, because most of them offer a limited number of ETFs.
- They don’t offer face-to-face meetings, but offer only limited contact methods and hours.
- They offer frequent portfolio rebalancing and sometimes this might hurt the investor.
- Sometimes they can be more expensive that traditional financial advisors.
- Sometimes tax-loss harvesting can create headaches at tax time.
These are not the only disadvantages of robo-advisors, but these are some of the most important disadvantages.