My Thoughts on Robo Advisors

I recently received a great question from  our Instagram community and it went something like this:

“What is your opinion on Robo Advisors? I was considering investing there first while I continue my education into investing independently. Is this a bad strategy?”

What an amazing question! Would you agree? Let’s dig into it.

First of all, for my beginners out there, let’s go over what a Robo Advisor is.

What is it?

A Robo Advisor is an investing platform that will invest FOR YOU based on different factors including but not limited to your risk tolerance and your investment goals.

As you complete an application to open one of these accounts, you’ll be asked a series of questions upfront. Your answers to those questions are then used by the platform to select investments that might work best for you based on your specific needs. This is done through a combination of an algorithm and a little something called “Artificial Intelligence”.

If that sounds way too “high tech” (and confusing), here is the simple version: You can think of a Robo Advisor as a “digital” version of a financial advisor or investment manager. As you might have already assumed, “Robo” refers to Robot. 

What differentiates these accounts from going directly to an investment manager or a financial advisor is that, for the most part, everything is done electronically.

You complete the application online, transfer your money online, and pretty much the entire process is between you and a computer. Hence, this cuts the “middle man” and the need to pay hefty fees to an actual person that might want to manage your money for you. 

Because there is no actual person working with you, this makes it so that the fees you are charged for investing your money are significantly lower than what someone would pay to a traditional advisor.

For example, management fees for popular Robo advisors that exist today charge anywhere from 0% to .30% per year (based on account balance). This is a jaw-dropping low fee considering a traditional investment manager typically charges significantly more. According to an Investopedia article, the average fee for financial advisor services is 1.02% of assets under management. 

When it comes to the money you’ll need to get started, many Robo advisors might not even have an account minimum while others might be within the range of $100-$500. More “sophisticated” Robo advisors might go as high as having a $50,000 requirement. However, those are very rare in this day and age.

Some Robo advisors do incorporate a “hybrid” model where you can have the option of being assigned to an individual to help guide you through your options and answer your questions along the way. However, this will depend on the company you select and you’ll need to check if that’s an option they offer (often for an extra fee).

My thoughts on these kinds of accounts.

 I honestly believe Robo Advisors are an amazing option for individuals that might not have the motivation, time, patience, or desire to research investments on their own and create their own investment accounts.

I feel we are blessed to live in present times. Is amazing to see how technology is making things like investing, not only more available to everyone but also a whole lot more affordable.

I personally don’t consider myself to be in the “target market” of Robo Advisors because I really love researching my own stocks, investments, and coming up with my own investing decisions. I enjoy the journey of managing my own money. However, for individuals that might prefer to be more “hands-off”, this is an excellent option.

And by the way – in case you were not aware, the Understanding Your Investing Options starter guide covers this very topic and provides examples of specific companies. It also covers information about online brokers, apps, and a whole lot more. You can check it out here.