Robots—they build our cars, vacuum our rugs, curate our social media feeds. And, since the first automated investing platforms made their debut in 2008, they even help us manage our finances. Robot advisors, or “robo-advisors,” are currently on track to manage $1 trillion in assets by 2020 according to Business Insider. As big names like Morgan Stanley and Wells Fargo rollout their own robos, an increasing number of investors are beginning to wonder about these market newcomers. What are the pros and cons of automated investing? And, more importantly, could a robo-advisor be the right choice for me?
What is a robo-advisor?
A robo-advisor is a digital investing platform (typically web-based) that offers automated wealth management with minimal human oversite. Robo-advisors use algorithms—sets of rules that tell the program how to react to certain conditions—to construct, rebalance, and reallocate low-cost and tax-efficient portfolios.
What are the benefits of using a robo-advisor?
- Lower Cost
While the advisory fees charged by robo-advisors vary depending on account balance, most tend to be lower than fees charged by their human counterparts. Some robos have no advisory fee and instead charge for add-on services. This is because robo-advisors favor passive investing styles that use low-cost mutual or exchange-traded funds to track different parts of the market with minimal trading.
- Highly Accessible
Volatile markets, tariffs, and trade wars–sometimes, you can feel the news in your retirement account. Most major robo-advisors like Betterment and Wealthfront offer phone apps that allow you to check your portfolio’s performance on the go. This allows you to track your performance in real time without waiting for your advisor or broker to issue a statement.
- Customizable
Want a portfolio that invests only in companies that are socially or environmentally responsible? What about companies owned by women? Maybe you want to invest with your spare change? Robo-advisors allow you to tailor your investment experience to your goals and values with just a few quick clicks.
- Educational Resources
Most robo-advisors have an educational resources section on their website filled with free videos, blog articles, and how-to guides that allow investors to learn more about investing and financial responsibility.
- Easy to use
Perhaps the greatest benefit of automated investing is that these platforms are unbelievably simple. Answer a short risk-tolerance questionnaire, select your portfolio type, set up automatic contributions from your bank account, and the program takes care of the rest. One of Cowen’s employees was able to set up a test account with Betterment in under ten minutes, and an Acorns account in five.
What are the downsides?
- Cold-hearted
When the market tanks, who you gonna call? Probably not a page of code. For investors with a lot to lose, a bear market serves up more scares than any ghost or ghoul. Experienced financial advisors help clients navigate the emotional side of investing by listening to their concerns, offering comfort and encouragement to stay the course, or suggesting alternative solutions. Robo-advisors invest well because they are rational and unemotional, but these same qualities leave them unequipped to handle their very human clients as well as more sensitive matters like retirement and estate planning.
- Limited Services
Since robo-advisors serve primarily as automated investment platforms, they lack the capacity to assist with large financial decisions such as marriages, divorces, buying a home or retiring.
- Low Variety
Interested in life or long-term care insurance? Annuities? Trusts? The stock market isn’t the only or even the best solution to everyone’s financial needs, and this is where robo-advisors come up short. Traditional advisors who believe in a holistic approach to financial planning have at their disposal an arsenal of products, investment options, and strategies that they can use to help clients reach their goals.
Is a robo-advisor right for me?
Robo-advisors are a good choice for new or small-time (under $20,000 in assets) investors who want to get their feet wet without having to shell out a large minimum account balance. Conventional advice would suggest that these platforms are strictly for younger people, but we think they provide an accessible introduction for older folks who have traditionally avoided the stock market and would like to start with a small account. However, if you have a 401k, need tax planning, or are looking to fund or rollover an account with a balance over $20,000, we strongly encourage you to find a human solution.
If you do choose to open an account with a robo-advisor, we suggest you also team up with a human advisor who can help you coordinate your investments with any outstanding annuities, CD’s, savings accounts, 401K’s, or IRA’s. This bionic advisor approach to investing allows you to combine the best of both human and robo-advisors. It’s also important to keep in mind that, just like human advisors, every robo-advisor is different and some may meet your needs better than others. A human advisor can help you decide if a robo-advisor is right for your situation, and, if so, help you choose an appropriate platform.
Sara McKinney
saractag@gmail.com
Sara is a recent graduate of Kalamazoo College and a new addition to the Cowen Team. Her responsibilities include IT support, event planning, and general administrative assistance.
