In this article, I’ll explain the types of investors for whom using a robo-advisor makes the most sense. I hope the information and analysis here will help you decide whether a robo-advisor could be a good tool to help you reach your personal investment goals.
Table of Contents
- 耀竣金融配资_在线配资炒股:What Is a Robo-Advisor?
- Who Should Use a Robo-Advisor?
- 耀竣金融配资_在线配资炒股:Advantages of Robo-Advisors
- 耀竣金融配资_在线配资炒股:Disadvantages of Robo-Advisors
- 耀竣金融配资_在线配资炒股:Understanding Robo-Advisor Fees vs. Other Options
- Analyzing the Results: Robo-Advisors vs. Other Options
- Analyzing the Results: Robo-Advisors vs. Full-Service Advisors
- Differences Between ETFs, Mutal Funds and Index Funds
What Is a Robo-Advisor?A robo-advisor is a passive investment management company that often costs a fraction of a full-service financial advisor. You fill out a questionnaire about your age, income and financial goals. The robo-advisor then recommends a pre-built portfolio that matches your risk tolerance. Since that process is automated and usually happens through a mobile app, robo-advisor companies enjoy relatively low overhead, which they pass to you as a consumer in the form of low annual management fees.
The idea is that you’ll continue contributing money to the robo-advisor, but for a small fee, you’ll never have to buy or sell a single stock. Robo-advisors usually invest your funds in a variety of low-cost 耀竣金融配资_在线配资炒股:mutual funds, 耀竣金融配资_在线配资炒股:exchange-traded funds (ETFs) and bonds.The portfolios are well-diversified and often lean on . They usually aren’t built to beat “the stock market” (often represented by the S&P 500). However, based on their allocations, robo-advisor portfolios should remain relatively stable even when the U.S. stock market isn’t performing well.
Who Should Use a Robo-Advisor?
There are plenty of reasons to use a robo-advisor to handle your investments. Start by asking yourself if you belong to any of the following groups.
“There are many people who don’t need comprehensive financial planning, who just need simple guidance on building and managing a portfolio,” money expert Clark Howard says. “Robo-investing gets people the right investment mix at a very low cost.”
- New investors who want a low-cost solution. Maybe you’re willing to manage your own investments. But you’re new to the game, and you recognize you’ve got a lot to learn. You could pay a professional financial advisor to give you holistic, personalized attention. Or you could pay a fraction of that to get similar investment guidance from a robo-advisor, saving yourself significant fees while you learn.
- Investors with little capital. The less money you have in your portfolio, the fewer options you have to diversify. The strategies that robo-advisors tend to use will give you broad exposure to numerous asset classes, even if you don’t have a lot of capital to invest.
- People who lack the time to manage their own investments. Perhaps you know what you’re doing as an investor. But if you’re forced to manage your own portfolio, and you’re busy, you may end up neglecting it. A robo-advisor can help you avoid having to rebalance your own portfolio or spend time maximizing your tax strategy.
- Those who aren’t interested in learning how to invest. The term “YOLO” (You Only Live Once) comes to mind here. Maybe you find investing to be boring. Maybe you’d rather spend your time planning your next beach vacation or playing with your kids. If this is you, perhaps you want to use a robo-advisor to invest.
Advantages of Robo-AdvisorsLet’s review some of the advantages of using a robo-advisor. Robo-advisors can:
- Take away stress. Once you’ve set up your robo-advisor, you’ll never have to make a decision about which stock to buy or what percentage of your portfolio to put into bonds.
- Offer professional management at a bargain. Your robo-advisor isn’t going to reassure you on the phone, help you prepare your taxes or adjust your finances on the fly when an unexpected life event happens. But if all you want is professional investment advice, you may be better served if you pay a little money to a robo-advisor rather than a lot of money to a human professional advisor.
- Allow for automated investing. This is great from a behavioral standpoint. Automation ensures you’ll continue to invest new money.
- Offer stability during market downturns. The United States stock market became volatile during the first half of 2020 as COVID-19 hit. Robo-advisors, which tend to be diversified, still .
- Handle tax-loss harvesting and automatic rebalancing. If one asset class in your portfolio performs well, it may start to represent an outsized percentage. Good robo-advisors rebalance those percentages for you. Many robo-advisors also offer some sort of tax-loss harvesting. This reduces your tax burden by selling off assets that have lost value (often replacing them by purchasing similar assets).
- Make it fast and simple to get started. Much like some of the best stock trading apps in 2023, you can open and fund a robo-advisor account with very little time and effort.
- Get you into the market for cheap. You probably won’t need a large sum of money to get started with a robo-advisor, and with some, you don’t need a cent to open an account.
Disadvantages of Robo-AdvisorsLet’s consider some of the negatives of using a robo-advisor.
- It’s relatively easy to avoid fees by following the same strategy on your own. It may seem intimidating, but it doesn’t take much internet research to figure out how to follow the same low-cost, diversified, long-term investment strategies that robo-advisors use.
- They provide little to no help with financial planning. Some robo-advisors have decent tools for tracking your goals, but you’ll find more sophisticated advice and planning elsewhere.
- If you do get any human help, it’s usually similar to a call center. By nature, robots don’t carry conversations with humans (not well, anyway, judging by the early stages of ChatGPT and others!). If a robo-advisor does offer the option of talking to a human, they’re likely working off a script at a call center. It’s extremely rare to get free advice from a Certified Financial Planner through your robo-advisor.
- They aren’t designed to beat the market. Your ROI (return on investment) probably will lag behind market indexes like the S&P 500 during bull markets.
- You won’t be able to pick individual stocks or securities. That isn’t necessarily bad. Most people overestimate their ability to pick individual stocks. But if you like to parlay your knowledge and reading into an occasional investment in a company you think will perform well, you can’t use a robo-advisor to make that buy.
- They aren’t a silver bullet to eliminate human error. You can still forget to contribute (if you don’t set up automated transfers), sell at a market low point in a panic or fail to increase your contributions over time.
Understanding Robo-Advisor Fees vs. Other Options
If you’ve read anyone’s advice regarding 耀竣金融配资_在线配资炒股:your investment options, you understand the general idea that you want to avoid fees. But it can be difficult to understand reality vs. theory when considering specific choices.
Among the companies that made our list of the best robo-advisors, it’s reasonable to expect a 0.25% annual fee and a 0.1% expense ratio. That’s an all-in cost of 0.35% per year.
“What separates robo-advisors is the cost of advice combined with the cost of the funds and investments,” Clark says. “Many high-cost outfits now tout robo-advisory and end up harming your financial future instead of helping it. Over time, low cost is everything in building financial security or wealth.”
You can replicate the strategy of most robo-advisors on your own by buying index funds, target date funds and ETFs, which are all passively-managed, low cost and well-diversified. You have to pay for the expense ratios whether you’re investing on your own or through a robo-advisor, but the DIY approach will save you the annual fees.In the chart below, we compare the costs of robo-advisors to the alternatives. We based our index fund on Vanguard’s Total Stock Market (VTSAX), which includes a 0.04% expense ratio. We based our target date fund on Vanguard’s Target Retirement 2050 (VFIFX), which carried a 0.15% expense ratio at the time of the calculation. Vanguard has waved its commissions, so you can buy into those funds with $0 trades. For the calculation of working with a full-service financial advisor, we assumed we’d pay 1.25% in annual fees and expense ratios. (The price range for full-service advisors varies more than the self-directed and robo-advisor investment categories, but 1.25% is a reasonable number.) Our hypothetical investment in each case is $10,000 upfront and an additional $10,000 per year for 5, 10, 20 and 30 years with a 6% annual return.
|Years||Index Fund||Target Date Fund||Robo-Advisor||Financial Advisor|
Analyzing the Results: Robo-Advisors vs. Index, Target Date FundsOf course, fees aren’t the only factor in real-life totals. Performance, almost guaranteed to vary, also matters. But in our hypothetical, all performances are equal.
Analyzing the Results: Robo-Advisors vs. Full-Service AdvisorsYou can see the numbers yourself in our table. If you’re just considering fees, your returns with a full-service advisor are really going to suffer. But good financial advisors offer benefits that may be just as important to you as market return. Sure, they’ll make sure you have the right allocation for your investments and will offer counsel if you need to adapt to a financial curveball. But most of them offer a comprehensive roster of services including financial planning, tax strategy and estate planning. You won’t get those perks if you’re investing on your own or through a robo-advisor.
Differences Between ETFs, Mutual Funds and Index FundsWhether you’re thinking about investing on your own or you want to compare robo-advisor options, you’ll want to understand the differences between an ETF, a mutual fund and an index fund. Let’s start with the definition of each term.
Mutual Fund: Mutual funds are professionally managed collections of securities like stocks, but you can buy them only after the trading day is over. One advantage of a mutual fund is that you can make automated contributions.
Exchange Traded Fund (ETF): Similar to mutual funds, ETFs are a professionally managed collection of securities such as stocks that often track indexes. ETF shares trade when the stock market is open just as ordinary stocks do. ETFs tend to have lower minimum investment requirements than mutual funds. From a tax perspective, ETFs usually are more efficient at avoiding capital gains than mutual funds.
Index Fund: Index funds are so-named because they track popular market indexes like the Dow Jones Industrial Average and Nasdaq Composite. The SPDR S&P 500 ETF (SPY), which tracks the S&P 500, is a good example of an index fund. Most ETFs and some mutual funds are index funds.showed that in 2019, the average expense ratio for mutual funds and ETFs was 0.45% and was likely to continue its two-decade downward trend. The study cited Vanguard’s 0.09% asset-weighted average expense ratio as the lowest that year.