Robo Investment Advice: The Pros and Cons
Robo-advisors have been making headlines lately as a great substitute for traditional personal financial advisors. But is robo investment advice worth the hype?
As with any decision regarding your money, it is essential to consider the pros and cons of robo advice before investing with a digital advisor. In particular, you should consider how robo investment advice stacks up against a financial advisor and which works better for your lifestyle.
What is Robo Investment Advice?
Robo advisors vary, depending on which platform you choose. Some robo-advisors are exactly what they sound like: based primarily on algorithms, these automated advisors use pre-programmed methods to determine what investments you should be making.
Although these robo-advisors are programmed to be as accurate as possible, some people might be worried about entrusting their investments to something that lacks a personality. For these individuals, a robo-advisor platform that offers a human connection may be a great alternative. This may be primarily an algorithm-based advisor with human customer service support, or a human who depends heavily on a computer to make investment recommendations.
Of course, no matter what robo advisor you choose, customer service should be available to help you get started and to troubleshoot if problems arise.
Overall, robo-advisors are becoming strong competitors in the personal finance field. Yet, their limitations have been called into question by some who cite the lack of personal touch as a reason for distrusting the algorithms. Some are concerned about the extent to which the robo-advisors can really put their customers’ interests first.
Robo investment advice can be confusing. If you are undecided about whether or not to use a robo-advisor, consider these robo-advisor pros and cons.
Robo-Advisor Pros and Cons
Cost: How Robo-Advisors Stack Up
Robo-advisors tend to be cheaper than the competition. Since financial advisors have to make a living and cover the costs of their place of business, their employees, and other miscellaneous expenses that come from owning a brick and mortar business, their fees are often higher than those of robo-advisors with minimal overhead.
It is not uncommon to see annual fees for robo-advisors of about 1/3 the cost of other financial advisors. These robo-advisory management fees are in addition to exchange traded fund or ETF fees. For clarification, every mutual or exchange traded fund has an underlying management fee. Index fund ETFs, used by most robo-advisors, have rock bottom fees ranging from 0.05% of assets under management (AUM) to approximately 0.52%.
Additionally, once the robo-advisor’s platform is set up, the company can serve thousands of clients with the same overhead. As long as there are sufficient customer service representatives to meet client demand, the per client cost is much lower for a robo-advisor than for a human advisor – and that is another reason why you get top level investment advice at a low price with a robo-advisor.
Really, there isn’t much of a con here – what’s better than saving 66-80% of the normal fees charged by financial planners? Still, you will want to watch for hidden fees. As with most disclaimers on the internet, it is easy to bypass the small print. Take care to read all the information from your robo-advisor.
Investing Minimums for Robo Investment Advice
Low investment minimums are another tic in the “pro” column for robo-advisors.
The great thing about robo investment advice is that you can benefit from top level investment management with a small initial investment. Again, the idea of overhead comes into play: physical businesses need to make money in order to pay for their staff, electricity, and so on. High fees and high minimum investments go hand in hand to make sure that financial planners can stay in business.
Since robo-advisors have fewer expenses, they can afford to take on smaller investor accounts. This is great news for millennials and people on tight budgets who cannot ordinarily afford to invest. The robo-advisors enable small investors to make as great a return on their money as possible, no matter what amount the client begins with.
Although there are some financial planners who also offer low minimum investment requirements they aren’t as plentiful as the robo-advisors willing to take on the small investing guy or gal.
For small investors, robo-advisors come out on top.
Personalized Investing Advice-Can Robo-Advisors Compete?
When it comes to the robo advisor pros and cons, this is one area that people can’t seem to agree on. Is the robo investment advice really as good as the investment advice of a financial professional?
Robo-advisors are becoming more advanced every day, so they are increasingly likely to provide you with personalized investing advice. The investing advice and plans provided by robo-advisors are based on a myriad of details that you provide, ranging from your age and investing style, to your retirement goals. Your robo-advisor will take your answers to these questions, and plug them into algorithms designed to give you the most personalized investment portfolio possible.
That being said, a robo-advisor will not be able to improvise. If you have a unique situation that does not come up during the initial question phase, it will not be considered. A robo-advisor would not be able to probe for more information if it sensed you had more to say in regards to a question.
One way to remedy this is to check back on your portfolio often, and reevaluate your situation as it changes. Still, that is something that should be done regardless of whether you use a robo advisor or a financial planner.
For those investors seeking a more personalized touch, there are robo-advisors with access to financial advisors. These robo-advisors have human advisors interwoven within their platforms:
- Personal Capital
- Vanguard Personal Advisor Services
- Schwab Intelligent Portfolios
Additionally, many traditional financial advisors are lowering their fees and adding digital investment advisor platforms to their suite of services.
The final tally of pros and cons of robo advice for personalized investment services is mixed. Some robo-advisors have online customer service reps without any investment or financially advisory background. Other robo-advisors offer automated digital investment advice and human advisors. Finally, many human financial advisors are adding in robo-advisors.
Personal Treatment from a Robo-Advisor
This is one area where robo-advisors may fall short. Although they are designed to take your unique situation into consideration when designing your investment portfolio, they are not designed to strike up a conversation about your kids or a new lunch spot.
Although some people will not mind the absence of small talk, for others this is a very real factor in choosing whether or not to invest using a robo-advisor. Going to visit your financial planner can be a comfort, particularly during dips in the market. The reassurance that someone has “got you” can make all the difference in difficult patches.
Robo investment advice firms attempt to compensate for this by creating specific robo-advisory products for specialty groups of people, like women. Still, they may not have the comforting factor that face-to-face contact can have.
When considering the pros and cons of robo-advisors, personal contact is generally a negative for the digital platforms.
Stability and Predictability of Robo-Advisors
Banks have been around for a long time, and although mergers happen, consumers rarely panic. The friendly bank on the corner will always be there, we trust. But what about robo-advisors? Will they stand the test of time?
The good news is that robo-advisors are a booming business. Some closures do happen, of course, but all evidence suggests that robo-advisors are here to stay. Robo-advisors are filling a need for people interested in quick, easy, and affordable investments – and there are many of these people! So it is unlikely that robo advisors will completely disappear any time in the near future. Although you may see some pending mergers and acquisitions in the robo investment advice arena.
Robo-Advisors Ease of Access
Here, robo-advisors take the cake. Robo investment advice never sleeps; you will be able to check or change your investments no matter what time it is.
Most robo-advisors are also easy to access across your various electronic devices, so it may even be possible to check your investments from your smartphone on your commute. This is invaluable for people who want to monitor their investment portfolios on the go.
Despite the decline of “banker’s hours” in favor of weekend and evening banking, financial planners are just not able to provide the same 24/7 availability that their robotic counterparts are. This can put financial planners at a disadvantage when working with people who have unconventional work schedules or difficulty reaching the office during business hours.
What Are My Investing Options?
Robo-advisors may be more limited than traditional financial planners in this case. The reason for this is that robo-advisors rely on algorithms to determine appropriate investments; programming a robo-advisor to take all possible investment types into consideration would be unreasonable, at least at this stage. In general, robo-advisors have limited number of ETFs within their platforms, and so if you’re looking for individual stocks and bonds or unique types of products, you won’t find them with most robos.
However, robo advisors certainly offer enough investing opportunities. If you are looking for limited partnerships or preferred stock, look elsewhere – if you would like a retirement fund, a robo-advisor is a fine fit.
What Matches Your Lifestyle and Personality? Final Robo-Advisor Pros and Cons
There is no one-size-fits-all approach to investing, no matter what medium you use to invest. Considering your own lifestyle needs and your investing personality is the first thing you need to do to consider whether or not a robo advisor is the right fit for you.
In a nutshell, there are many benefits to robo advisors. They:
- Are affordable, and offer low or no minimum balances
- Personalize your portfolio based on a series of questions
- Can be accessed 24/7, often times from your phone
These benefits make robo advisors a good fit for:
- Beginning investors, who need some minimal assistance
- People on tight budgets
- Busy individuals
- People with basic investing needs
Other individuals may find robo-advisors a comfortable place to put at least some of their assets as well; the ease of use combined with on-demand access means that even individuals who do business with financial planners can make use of a robo-advisor from time to time.
Of course there are some downsides to choosing a robo-advisor. They:
- Are unable to make small talk, and lack the “personal touch” in many cases
- Cannot go beyond their pre-programed questions when creating your investment portfolio
- Can be slightly limiting if you are looking for more complex investments
For these reasons, robo-advisors may not be the best choice for individuals who:
- Need face-to-face contact to feel comfortable
- Have more advanced or complicated investing needs
- Like to be coached through every investment decision
All in all, robo-advisors offer an alternative to traditional financial planners and are worth serious consideration. Whether or not the benefits outweigh the negatives depends entirely on your own financial situation, lifestyle and personality traits. Consider the pros and cons of robo advisors carefully before making any decisions. Finally, the robo investment advice might just be suitable for your needs.