5 Things You Need to Know About Robo Advisor
5 Things You Need to Know About Robo Advisor
Babyboomers.com Staff

It’s no longer a secret that investing in the stock market is much more complicated than many people make it out to be, and with multiple investment classes to choose from (mutual funds, bonds, stocks, etc.), things can get even trickier.

Investing has become so much more accessible nowadays thanks to technological advancement; Robo advisors are now available for anyone who wants (or needs) help to manage their money. Still, confused about what is a Robo advisor? Here are 5 things you need to know about them:

1. What is a Robo advisor?

 An automated service provided through an online platform that assesses your financial situation and uses algorithms tailored to your profile to build an investment portfolio based on Modern Portfolio Theory. The only thing you have to do is answer a series of questions to set up your profile.

2. What makes Robo advisors unique?

They’re mainly low-cost because they have virtually no overhead costs, and depending on the platform, there may not even be an account minimum for you to open an account with them. Because of that, Robo advisors are a great way for new investors to get started or for anyone who doesn’t want to make their financial decisions on their own. Since all of the research has been done for you, Robo advisors also tend to offer more personalized advice since they take into consideration your age, goals, and even comfort level with investment risk. You can expect things like tax-loss harvesting as well as dividend reinvestment plans with most Robo advisors.

3. Who can benefit from using a Robo advisor?

Anyone looking for help managing their money, especially new investors or those who aren’t ready to take care of their investments on their own. Whether you want someone to develop a specific plan tailored to your goals and risk level or simply monitor and rebalance your portfolio, chances are there is a Robo advisor out there that will suit your needs. Also, since the asset classes (stocks, bonds) and investment strategies used by Robo advisors tend to be highly tax-efficient, many retirees may also consider using one.

4. What kind of fees can I expect to pay?

This depends on which platform you use and what services they provide, but the fee structures are generally very transparent. Just like with humans, Robo advisors charge an asset management fee plus expenses for trading. The good news is that many of them offer tax-loss harvesting and reporting features for free; you’ll only be charged a fee if they actually implement it. Another option is to choose a Robo advisor that offers advisory services as part of their package, which can compensate for the low cost incurred by using a Robo advisor in the first place.

5. What are some limitations?

For starters, many Robo advisors require the use of their own ETFs or mutual funds, so there’s no diversification between investment classes or across different platforms. Also, since most Robo advisors use automated portfolio rebalancing strategies, there’s no human touch.

The bottom line is that Robo advisors offer a convenient and low-cost way for investors to get started with investing or just have someone to hold their hand when making important decisions. It’s also important to keep in mind that they are not made to replace the role of a financial advisor since only you can determine your goals, your timeline, and what risks you can take. A Robo advisor should be seen more like an adviser lite’; someone who offers great advice but without having to pay half of your portfolio in fees.

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