How do Robo-Advisor Services Work
If you are a beginner with no experience in investment, a Robo advisor can be your best friend. Designed to provide automated planning services, Robo advisors work as digital platforms that evaluate your goals and financial situation and then give you solid advice on investment. Sometimes they even invest on your behalf.
A Robo advisor has all the capabilities to help you save your money and create a portfolio for you. If you want to explore the world of Robo advisors in a better way, this article will serve you well. From what is a Robo advisor to how do Robo advisors work, you will find the answers to all your burning questions here.
Start trading or investing in stocks right now with Interactive Brokers!What Is a Robo-Advisor?
Imagine having an urge to use your savings and invest them in a better way, but due to a lack of financial knowledge, you fail to evaluate your possibilities. In that case, seeking help from a Robo advisor will be a wise move to make.
Defined as investment managers, Robo advisors are automated platforms that make all the decisions regarding your investment without requiring your input. While you can't compare a Robo advisor with a traditional advisor's services, they still can save your money even if you own a small portfolio.
One of the best things about Robo advisors is that they are pretty convenient to use. With easy signup and intuitive mechanisms, you won't struggle to understand them. Besides, contrary to common belief, Robo advisors also offer many unique security features, comprehensive knowledge, low fees, and quick customer services, making an investment a less-daunting task for you.
What are Robo-Advisor Costs?
As discussed above, Robo advisors charge low fees, but what does that mean? First, compared to a professional human advisor, Robo advisors are pretty inexpensive.
For instance, many advisors only charge annually between 0.25% and 0.50% for management fees. Additionally, companies such as SoFi Invest demand zero investment or management fees.
What's more, some Robo advisors also do not require you to have any minimum balance in your account to start, which again works well for people with limited savings.
A few advisors request you to pay a few as a percentage of the assets that are under the Robo advisor's control. For example, if you have $10,000 in your account, you may be asked to pay a minimum fee of $25 every year.
What is a Typical Account Minimum
Now that varies according to the Robo advisor you go for. For instance, some Robo advisors require a minimum amount of $5000 or even more to start benefiting you. On the other hand, a few advisors demand as low as $500 or less investment.
Here are a few examples:
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Ally's Robo advisor demands a minimum investment of just $100. This characteristic makes this advisor quite alluring.
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Alternatively, Ellevest requires a nil minimum investment amount to get started. This quality makes this Robo advisor unique.
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On the other hand, Vanguard's Robo advisor demands a minimum investment of around $3000.
Pros and Cons for Beginners
There are many reasons why Robo advisors are considered appropriate for beginners. Since they are easy to use and require quick signups, they offer beginners the convenience to use them with ease.
Further, novice investors can also use robot advisors to create their unique financial portfolio without requiring extensive finances.
Below we have created a list of pros and cons of using Robo advisors by beginners.
Pros
Here are some of the benefits of Robo advisors:
Many Robo advisors charge a very minimum fee, and some do not charge. This allows even the people with limited budgets to use Robo advisors for their financial decisions.
Robo advisors are pretty convenient to use. Each robot advisor has its website, and you can easily change the investment settings or direction of the advisor conveniently.
One of the best qualities of using a Robo advisor is its high accessibility. Since almost all Robo advisor apps are available on iOS and Android, you can keep a check on your investment from any part of the world.
The quick signup process makes Robo advisors suitable for millennials or young investors, who lack the patience and time to invest.
Using Robo advisors is relatively safe. With a strong focus on data privacy and sophisticated firewalls, these advisors successfully prevent the access of any unauthorized hacker.
Cons
While Robo advisors are pretty helpful for beginners, they have a few downsides.
Some Robo advisors charge high management fees that are easily more than most other investment alternatives, such as index fund investing.
Robo advisors usually demand a monthly or yearly fee that can add up to the overall costs.
How Do Robo Advisors Work? Typical Examples
Here is a simple explanation of how a Robo advisor works. First, a Robo advisor asks various questions regarding your financial goals and investment plans through a survey. After receiving answers, it then evaluates the replies to curate financial advice for you or invests on your behalf automatically.
All Robo advisors work as automated investment services. They utilize computer programs and algorithms to plan and manage various investment opportunities for you.
Interestingly, Robo advisors have been a part of this technological world since 1990. However, only in 2008 did they get the recognition and popularity they aimed for. During the Financial Crisis, people lost their trust in various financial institutions, as many feared that their money wasn't relatively safe with traditional financial advisors.
If you want to invest but don't know how to or don't have the time to consult an advisor, a Robo advisor proves quite helpful. Within a few minutes, you can get your account ready and sign up on a smooth investment journey.
Unfortunately, many people still consider Robo advisors as unsafe or untrustworthy. It is more accurate for people who value face-to-face interaction with a financial advisor higher than a machine. But that's just a unique perception that most people have.
One of the best qualities of a Robo advisor is that it considers all the financial goals. The online questionnaire covers all the crucial questions that focus on your financial position and future objectives. The robot advisor evaluates the answers to these queries to curate personalized instructions and plans for investment.
Here are some services that all Robo advisors provide:
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Easy account creation
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Goal development
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Security features
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Customer service
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Portfolio management
Most Robo advisors provide diversified portfolios on ETFs (exchange-traded funds) or indexed funds for people looking for a simple financial plan. Additionally, a few services offer portfolio rebalancing, tax-loss harvesting, and goal-setting options for different clients.
Below are some ways in which some Robo advisors work.
M1 Finance
This robot advisor contains a variety of pre-made portfolios and investment plans for you to choose from. Moreover, the advisor allows you to create multiple accounts, including taxable accounts, LLC business accounts, and IRAs.
SoFi Invest
While working as an automated manager for investment, SoFi Invest also provides many different lending products. In addition, investors can create both joint and individual taxable accounts to benefit from this advisor's services.
Are Robo-Advisors Legit?
Yes, they are. Regulated by the SEC or US Securities and Exchange Commission, Robo advisors are dealt with just like human advisors in the USA. SEC categorizes Robo advisors as similar to other investment plans and recognizes the risks they might portray.
According to the SEC, "Before making a decision about whether to invest through a Robo-adviser, or in deciding which robot-adviser might be best for you, you should do your own research. Make sure the robot-adviser and the investment portfolio it puts together for you are a good match for your investment needs and goals, and that you understand the potential costs, risks, and benefits of using that particular robot-adviser."
Below are some of the factors that the SEC has highlighted to help you evaluate a Robo advisor.
Level of Human Interaction
Every robot advisor provides a different degree of human interaction. Some advisors offer hybrid or bionic advice in which an investor gets an opportunity to interact with a professional regarding their investment needs.
However, other advisors may only limit your interaction to support staff, and in that case, you will only have the website and other sources to rely on. Additionally, even if a robot advisor allows you some human interaction, its level may vary.
For instance, a professional might be just available through email and not by phone or other communication mediums. Besides, the number of in-person meetings might be limited for some clients.
Information Used By a Robo Advisor
As stated above, a Robo advisor uses your provided information to devise an investment solution for you. Therefore, a Robo advisor doesn't have any other sources of information other than an online questionnaire to curate a recommendation.
Due to this limitation, there could be many misconceptions, and the SEC requires you to ask the following questions before taking a recommendation from a Robo advisor.
Do you want to take the services of a Robo advisor for a specific financial goal, or do you want it to help it with your entire financial needs?
Does your chosen robot advisor ask questions about loans, saving accounts, or real estate holdings?
Does the survey cover questions on your risk potential? If yes, how do you respond to such queries?
Investment Approach
Different Robo advisors offer varying products and investment plans. For example, some advisors come with pre-determined investment portfolios that you might fail to customize. Alternatively, some Robo advisors have very few investment products.
According to the SEC, every investor should take their good time to evaluate the approach a Robo advisor uses to create a recommendation.
Registration and Licensing
It is mandatory for all robot advisors to follow the laws applicable to state-registered investment providers or SEC. If you want to know more about an advisor, visit the website of SEC's Investment Advisor Public Disclosure to explore its database for all the information.
Additionally, a firm that offers the services of a Robo advisor might be affiliated with a particular broker. So, to know the details of that broker, you can explore the same database as mentioned above.
Is Robo-Advisor Good for Beginners? Top 5 benefits
Yes, it is. Below we have explained the top five benefits a beginner can reap from a Robo advisor.
Low Fees
Most novice investors hesitate to use a platform that charges them a large amount of money in exchange for their services. However, thankfully, Robo advisors charge minimal fees and ensure that the investor doesn't accumulate expenses while using their services.
Portfolio Recommendations
The first interaction with a Robo advisor is usually through a questionnaire, which it then uses to curate investment portfolios for you. As beginners, you won't feel this process intimidating, making the whole signup procedure convenient.
Accounts Availability
Most Robo advisors offer both taxable and individual accounts. Moreover, many also help manage a trust, which gives a certain degree of flexibility when choosing an account.
Accessibility of Services
Most Robo-advisors have very low entry levels. Even those with high criteria are still more accessible than most financial advisors. Most Robo advisors are easily approachable for a small minimum investment.
Easy Use
Finally, it is pretty easy to utilize the services of Robo advisors. There are no technicalities required during the process, and you can quickly sign up to start your investment journey.
Can I Lose Money With a Robo-Advisor?
Can you lose money with Robo-advisors? While Robo advisors are pretty safe to use, you can still lose your money in some cases. However, the risk associated with a Robo advisor is still lower than what individual trading may pose.
This is because the concept of Robo advisory is based on passive investing. In simple words, the idea uses low-cost funds to recommend different mixes of preset investments.
Robo advisors don't aim to beat the market. Instead, they focus on matching the gains of the whole market with time. In a practical world, the strategy to hold and buy a diversified portfolio without messing with it saves the day.
Also, to mitigate this risk, it is also important to do your research properly before choosing a certain Robo advisor.
Top 3 Robo-Advisors in 2024
Now that you have explored all the nitty-gritty details of Robo advisors, it is time to learn about the top three Robo advisors that might catch your attention in 2023.
Here are the complete details on our three shining candidates.
M1 Finance
Another amazing Robo advisor, M1 Finance, doesn't charge any management fee. Besides, the advisor has a very low entry point, making it quite affordable for beginners or people with limited funds. The minimum investment requirement is just $100.
There are many features that make M1 Finance stand out from other competitors. For instance, this Robo advisor offers many pre-made portfolios and a variety of categories of investments to choose from.
These characteristics make M1 Finance an easy choice for people who want to experience Robo advisory for the first time. M1 Finance allows you to create more than one account with this platform, including taxable accounts and IRAs.
SoFi Invest
Designed for both novice and professional traders, SoFi Invest has a management fee of 0% and does not even require any minimum investment.
What's more, this robot advisor proudly provides free accessibility to a career counselor and financial advisor, as required. All investors can either make a joint or individual taxable account. The AUM of this advisor is around $100 million.
SoFi Invest also provides trading for cryptocurrency and different other digital assets. If you plan to get a plan for your retirement, SoFi Invest will assist you in every way.
Betterment
The fee structure of Betterment is quite simple. The advisor charges 0.25% AUM on the Digital plan and 0.40% AUM on their Premium plan. What's more, there is a 0.10% discount on accounts with a value of more than $2 million.
Similar to SoFi Invest,Betterment doesn't have a minimum balance requirement, which makes it quite easy for beginners to explore this Robo advisor. Betterment is also quite popular when it comes to providing a different variety of investment funds. The company's robot advisor also offers many plans and a few la carte financial packages.
FAQs
Below we have answered some common questions on Robo advisors.
How much should I invest in a Robo-advisor?
It all depends on your financial state. Some Robo advisors require a minimum of $500 or less investment, while others demand anything between $1000 to $5000.
Are Robo advisors worth it?
Yes, they are a great way to make your first investment portfolio without having any financial background knowledge. Moreover, since they are low-cost options, their risks are far lower than investment plans supervised by humans.
Are Robo advisors capable of beating the market?
No, they aren't. While some follow a strategy related to index fund investing, they match the performance of the market but don't beat it.
How do Robo advisors earn money?
They usually get their money through a fee linked with assets under management or AUM. Compared to human financial advisors that charge 1% of AUM every year, Robo advisors usually charge only 0.25% annually.
Team that worked on the article
Johnathan M. is a U.S.-based writer and investor, a contributor to the Traders Union website. His two primary areas of expertise include finance and investing (specifically, forex and commodity trading) and religion/spirituality/meditation.
His experience includes writing articles for Investopedia.com, being the head writer for the Steve Pomeranz Show, a personal finance radio program on NPR. Johnathan is also an active currency (forex) trader, with over 20 years of investing experience.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.
Olga’s motto: Do well and you’ll be well!
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.