Investing Commentary

Are Robo-Advisors a Scam? Get the Facts

Find out if Robo-Advisors are a Scam or Not

By staff columnist, Alexandra Deluise

Easy and cheap investment options, overseen by a robot? Definitely too good to be true—right? When you put it like that, robo-advisors do seem like some sort of new-age internet scam. Can robo-advisors really stack up against trustworthy and educated—never mind human—financial planners, or are they out to rob you of your hard-earned money?

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The good news is that robo-advisors are not a scam. Here are just a few of the reasons why you can trust a robo-advisor to help you make sound investing decisions.

What is a robo-advisor anyway?

Robo-advisors are electronic or virtual financial advisors designed to help people make smart investing choices. They are designed to be replacements for traditional financial advisors and are often much cheaper than traditional investment options because there is little overhead. The savings get passed right to the users.

Yes, that means that even free robo-advisors are not necessarily scams!

Are robo-advisors a scam?

The ultimate goal of a robo-advisor is to help you build wealth; scams, on the other hand, want to take your money.

Of course there are risks with robo-advisors, but these risks are not due to some elaborate scam! Any investment option comes with a risk of financial loss. Robo-advisors are actually well equipped to think through the ups and downs in the market and to suggest portfolio rebalancing options based on a number of factors.

The best part? They do all of this much more quickly than a human advisor.

So there are no people involved?

That depends on the type of robo-advisor you choose. Many robos come with human connection in some form or another, whether the humans work in customer service or take a more hands-on approach to helping you manage your investments.

The most hands-off robo-advisors are not merely information-mining machines. These robo-advisors are typically built either for simplistic investing options or more advanced and confident users. Robo-advisors with humans on staff vary widely, and can either be part of a more premium (read: expensive) package to service high-value portfolios, or offer a unique balance of human interaction and robo-advisor calculations to help give you the best of both worlds.

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How do robo-advisors work?

Robo-advisors work by asking you a few questions and gathering data about your current financial situation, future goals, and risk tolerance. This does not mean that they are seeking out personal information to scam you! Robo-advisors need this sort of data in order to make sound recommendations for your financial future.

Much like a traditional advisor, robo-advisors use your personal information to personalize your investing experience. Whether a robo-advisor recommends that you jump feet-first into the stock market or stay away from such volatile investments depends largely on how you answer the initial questions. While you can always tweak your investment strategy as you go, it’s best to start with a plan that is truly tailored to your needs.

Robo-advisors are very good at keeping your data safe, too! They are encrypted with bank-level security, which is designed to keep hackers out of your finances.

But isn’t this ‘robo-advisor’ too good to be true?

Robo-advisors do seem to be the best thing to enter the investing scene. As you evaluate whether a specific robo-advisor is a scam or not, consider the following questions:

  1. Are you being pushed to make a decision quickly?

Although there are certainly moments when the market is doing quite well, you should beware of anyone (robo-advisor or otherwise) who makes it seem essential that you make an investing decision immediately. A good robo-advisor may automatically rebalance your portfolio based on allocations you design, but it will never give you an ultimatum or pressure you to make rapid decisions regarding your finances.

Never be afraid to walk away from a seemingly good deal if you feel you need to rush into a decision. Overnight successes are rare in the investing realm, so taking an extra day to make a decision will likely not hurt your portfolio.

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  1. Are you guaranteed a return on your investments?

This should always be a big red flag any time money is involved. Investments are never guaranteed. They can’t be. The market is always in flux, and people lose money every day even in the best of times. While many robo-advisors have proven track records of successful investing advice, they should never try to guarantee your investments will always grow.

Instead, look for robo-advisors that offer information about portfolio performance or human consultants that will talk with you if the market takes a sudden turn. Having a layer of support and knowing that the robo-advisor is programmed to compensate for losses will help you avoid scams and feel more confident.

  1. Is it clear how your money is going to be protected?

Even though your portfolio may drop in value as the market fluctuates, robo-advisors that are not scams will have ways of ensuring that your money is protected against fraud. For instance, a good robo-advisor will have encryption throughout the program to protect your data. And, much like banks, robo-advisors will likely carry insurance to protect you against loss if the robo-advisor goes bankrupt.

Don’t forget to verify these protections, too! If you’ve never heard of a specific insurance company that supposedly protects your assets, dig a little deeper. The Securities and Exchange Commission (SEC) is a good place to learn more about robo-advisor scams.

How to avoid robo-advisor scams: a checklist

Even though real robo-advisors are not a scam, you always want to be careful with investing your money online. Avoid scams by:

  • Asking questions or doing research.
  • Approaching situations with a healthy dose of skepticism.
  • Consulting a trusted friend or website (like Robo-Advisor Pros!) to see what others are saying about the investment option.
  • Listening to your gut instinct. If something seems too good to be true or makes you question its validity, take a step back and reevaluate.

Remember that even robo-advisors have disadvantages, and that no investment strategy is foolproof.  That being said, robo-advisors are usually equal in security and investment reliability to traditional financial advisors.

Staff columnist Alexandra DeLuise combines her banking experience with real-world financial advice to provide simple money tips to everyday people.

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Barbara A. Friedberg, MBA, MS

Barbara A. Friedberg, MBA, MS

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