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What is a robo-advisor?
A robo-advisor is an online financial advisor that provides investment advice based upon algorithmically generated portfolio management recommendations. It is a computer programed with financial analysis software that uses standardized portfolio theories to generate the best possible investment portfolio for your purposes. You enter information regarding your age, risk tolerance, and goals and the financial modelling software calculates a recommended asset allocation. Some of the robo-advisor will implement portfolio rebalancing automatically based on your profile and recent market performance. There is no human interaction or intervention and the recommendation is machine generated. Thus the name robo-advisor.
Do I need a robo-advisor?
There are different levels of assistance that you can get from a financial advisor. If you want a minimal amount of guidance and have uncomplicated investment needs, then you may find a Target Date Fund to offer all the help you need for your retirement savings. These funds provide a dynamic mix of stock and bonds funds that are structured to match your targeted retirement date. At the other end of the spectrum, if you have a more complex investment need, have many sources of wealth, or are interested in more closely managing your income and taxes, you may wish to hire a financial planner to coordinate your individual financial plan. If you are somewhere in the middle, you may want to look into obtaining the assistance of a robo-advisor to make some recommendations on your investments.
What does a robo-advisor cost?
You’ve probably been around long enough to know that nothing is totally free. There are always fees for services so you are right to ask the question and explore the costs of alternatives. The robo-advisor is the middle path of financial advisors and appropriately is mid-range in terms of fees for services. The target date funds are the simplest tools for matching investment allocations to retirement goals and thus have the lowest fees build into them. A target date fund will have fees only a few basis points higher than the funds it invests in. If you utilize a personal financial planner, you should expect to pay much higher fees for services, depending on the complexity of your needs and the size of your account. Personal financial planners can charge one percent of your total assets per year and may also receive commissions based upon their recommendations. The robo-advisor will charge a flat fee of about a quarter to a half of one percent of your total assets and this may decline as your assets, under management, grow. Generally it is a smaller incremental fee that is well worth paying if you have a mid-sized portfolio and want a more personally tailored investment plan.
What are the pros and cons?
There is always an upside and a downside to every product. The obvious benefit to the robo-advisor is that you get an investment solution that is tailored to your individual situation and preferences. Also important are factors like utilizing modern portfolio theory to get the best returns on your investment based upon your risk profile. Over time, the rebalancing features may help squeeze extra returns based upon market movements and having an automated service may help keep you invested in a difficult market. The detractors would include the extra fees that you pay for the service and concerns about whether the machine really knows what your risk preferences are. Also, since these advisors have only been available for a short time, no one knows how well they will perform in a down market.
Where can I find a robo-advisor?
The robo-advisor service works by delivering investment advice efficiently and uniformly across a broad market. The internet is the ideal platform for these services and you will find many web based offerings. If you have a PERA 401(k) or 457 plan, you have access to a robo-advisor through VOYA Retirement Advisors. On the web you can find new robo-advisor services from Betterment, Wealthfront, Personal Capital, and Vanguard Personal Advisor Services.
Is it right for me?
One of the great secrets of happy investors is to know their own temperament. If you are the type of investor who has no inclination to watch the markets and just want to contribute to a retirement savings plan with the goal of having a good amount of savings socked away to draw upon when they retire, then a target date fund is right for you. If you like to follow the markets and want to participate in several asset types to maximize your returns, but you are worried that you don’t have the time or the knowledge to follow your investments closely, then you should look into robo-advisors. If you are actively engaged in your investment decisions, have a large and complex portfolio, or have tax and estate issues, then the personal financial advisor might be appropriate for you. Just a little self-refection will lead you to the correct decision.