I have been using a Robo Advisor for a while for several investments. The major reason is that I am not a professional full-time investment professional who can watch and choose the right index funds and EFTs. The time and knowledge required to do it well is high, so I found Robo Advisors useful for me. There are many significant reasons to use a Robo Advisors, but there are also some catches we will talk about in this post.
What is a Robo Advisor?
Robo Advisor is an automated investment platform that builds, constructs, and maintains your financial portfolio. When you open an account, you can pick your risk, your goals and timeframe. Once the Robo Advisor has this information, it will build your portfolio. It does these with lower fees than a traditional advisor. The design, questions and setup to get investing are quick and easy.
Behind the scenes, you are still hiring a company that manages the portfolio, funds, ETFs as a whole but just not your account. The difference here is they are using technology and algorithms that are being tweaked to help my Robo Advisor make the best decisions it can make.
Ease of use
I have used a variety of different companies that offer Robo Advisors and I would say overall they are easy to use. It will create your portfolio depending on how much you want to spend, risk tolerance and contributions. To open, fund or setup automatic payments is easy to do. To check how a portfolio has performed is straightforward. Overall, a Robo Advisor is easy to use for a passive investor.
Tax Loss Harvesting
One of my favorite features of a Robo Advisor is the Tax Loss Harvesting capabilities. When short market losses occur the Robo Advisor will use these losses to offset gains subject to tax. Tax Loss Harvesting is not a game changing feature that is going to make you rich, but a nice benefit.
This is only helpful on accounts that are taxable. Retirement funds such as 401K that are target oriented cannot take advantage of this.
The Low Fees
I use Wealthfront for a few accounts, but there are many other companies out there that do the same thing. For example, Wealthfront offers fees of 0.25%. Now some Robo Advisors have a slightly higher or lower fee, the average passive investor will find savings in using a Robo Advisor. It is not a one size fits all even for myself but found some uses for it.
I Set Realistic Expectations
Robo Advisors are not a one size fits all. It really depends on your financial tolerance and your investment strategy. Robo Advisors focus on low cost indexed EFTs. It has proven low cost EFTs to give a return on your money over time but not make you rich.
A Robo Advisor is a computer algorithm planning your portfolio. The allocations and plan of a Robo Advisor setup might not be perfect for your financial situation. View a Robo Advisor as a tool to help manage and maintain your portfolio, not optimize it.
Last, it is an investment. Investments can rise and fall, but since your portfolio is managed by a Robo Advisor, it does not mean it can prevent losses from any other investment. Sometimes you will make money, sometimes you will lose it like any other investment.
Is a Robo Advisor right for you?
Robo Advisor are an easy low cost way of getting a managed portfolio. There are all in one funds out there that are lower cost but you will need to decide what makes sense for you. Since this is not a professional advisor, none of them will offer or guarantee success but an easy low cost management of your portfolio.
If you are looking for a simple, easy to use, low cost investment portfolio, a Robo Advisor might be a great option for you.