As technology continues to have a huge impact on every part of our lives, there seems to be no industry that has not been affected or drastically changed by the use of automation. The financial field is no different. Today, those who want to invest, budget, or save for retirement have the option of using what are casually called “robo-advisors.”
Basically, a robo-advisor is a term used to describe an automated service that uses technology and algorithms to generate investment advice and to help you manage your investment portfolio. In many cases, it takes away the need for using a human financial advisor and those of all generations are gravitating toward the option as a way to get instant service and save on costs.
Just as with any technology, robo-advisors are not right for everyone. If you’re curious about whether or not a robo-advisor might be the answer to your financial issues, consider the following seven points:
No Two Robo-advisors Are Alike
Robo-advisors are not one size fits all. Some are a hybrid between automation and a human advisor, while others are fully automated or provide online chat options so you can talk to financial representatives when necessary. Depending on your personal preferences and what stage of earning you are in, you can usually find a robo-advisor that closely fits your needs and preferences.
Robo-advisors Can Provide On-Demand Service
The millennial generation is much more used to on-demand services than their older counterparts. They’re used to getting answers immediately and being able to access everything from entertainment to shopping with the swipe of a finger. For those who have little patience and tend to be swift decision-makers, robo-advising can be a great fit.
Robo Advisors Are Usually Lower in Cost Than Traditional Advisors
No matter whether you work with a fee-based advisor or one who makes a commission off every stock or investment product they sell, working with a human advisor is not cheap. For those who don’t need a lot (or any) hands-on attention, robo-advisors can be a low-cost alternative. Many robos use low-fee changes funds to build portfolios and most don’t charge commissions. While most charge some sort of management fee either based on the assets you have with them or a flat fee, in most cases, it’s much less than what you’d pay for a traditional advisor.
If You Already Have Money Spread Out, You’ll Have to Pay to Move It
If you’re deep into your earning years and already have a portfolio made up of an IRA, stocks, and a 401K, you might not want to move everything over to a robo-advisor and lose the relationships you’ve built over the years. There might also be some costs involved that you don’t want to pay and you may also face tax consequences. If this is the case for you, robo-advising may not be in your best interest.
Robo-advisors Are Sometimes a Good Bridge Between DIY Investing and Using an Advisor
There’s a broad spectrum of preferences among investors. Some love the freedom and excitement that comes with day-trading or managing their own investments, while others would prefer to have a professional handle everything for them. If you fall somewhere in the middle of these two extremes, a robo-advisor could be a good bridge that offers the best of both worlds. You can choose one that more heavily weighted on the automated side if you’re a DIY-lover, or you can pick one that has some human interaction if you land closer to the other side of the spectrum.
Robo-advisors Can Be Dangerous for Emotional Investors
Emotional investors who are constantly buying, selling, and changing their strategy based on financial news and fear need to be reigned in by professional financial advisors. If they are given an opportunity to manage their own money, they’ll like make a lot of rash decisions that aren’t in their best interest. If you’re an emotional investor, it’s probably worth the investment to work with a fiduciary who can get to know your personality and help guide you in the best direction.
Robo-advisors Don’t Serve the Need for Relationship Development
Your relationship with your financial advisor can be one of the most important in your adult life. They can be a source of comfort, advice, and a beacon when you feel you’ve lost your way financially. If any of this is important to you, you probably will not be satisfied with the automated services you’ll receive from a robo-advisor. Just as those who love to talk on the phone feel unfulfilled with texting, investors who enjoy a deep relationship with their advisors will feel empty working with an automated service.
While robo-advisors can provide a valuable service to those who don’t need a lot of hands-on attention, they aren’t right for every investor. Make sure you consider the above seven tips when deciding if a robo-advisor is right for you.