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Mystery key players in the investment world work behind the scenes to increase financial portfolios. And their identity may surprise you: They’re “robo-advisors” — automated online financial management platforms that take the place of traditional human financial advisers.
Unlike the good ol’ days, when a human reviewed your financial situation, talked through your investment and financial goals and tried to build a portfolio tailored to your needs, the advanced software of automated advisers does all the work for you.
Robo-advisors choose investment opportunities for you based on computer algorithms programmed with your specific financial portfolio preferences, such as risk tolerance and capability, along with your goals and timeline.
Although the concept of allowing a “robot” to manage your finances might sound a little Orwellian, auto advisers can benefit many types of consumers. Robo-advisors can manage basic portfolios at a lot lower costs than human financial advisers — and may even pick up on investment trends faster, thanks to specialized technology that works for you.
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A robo-advisor is not actually an adviser at all — nor does it refer to one thing. Rather, it describes any number of online platforms that track investment trends, follow an algorithm designed for a client’s portfolio preferences and recommend opportunities to save or invest.
Although “robo-advisors” sounds like something out of Terminator, there’s nothing cheesy about these technology-based financial players. In 2017 alone, these advisers managed a total of more than $200 billion in assets for clients.
Automated advisers are best for basic portfolios that aren’t overly complicated or complex. They are also helpful if you’re on a budget, typically offering lower fees than typical advising services.
If your portfolio includes many components, you have a sizeable investment or you’re looking for individualized, customized options, a human adviser might be a better fit.
Because these advisers are software, you’ll typically fill out a financial questionnaire to help “program” that software with your investment preferences.
Your preferences can include:
Many people value the ease of a robo-advisor’s automation when it comes to managing and growing their investments, among other benefits that include:
Because there are two sides to every story, there are also potential drawbacks to consider to using a robo-advisor. For example:
Fees for using a robo-advisor or human adviser vary based on the company you go with — and even vary among human advisers.
Top-level private advisers, for example, tend to charge a lot more than beginning or standard firm advisers. Some companies charge fee reflecting a percentage of your assets, while others may impose an annual or initial investment fee.
Still, robo-advisors are typically more affordable than human advisers. Here’s what you’ll pay for automated advisers through big-name providers.
| Options or portfolios | Minimum investment | Annual percentage or fee | |
|---|---|---|---|
| Vanguard | Includes a personal human adviser for the best of both worlds | $50,000 | 0.30% |
| Schwab | Investor ratio | $5,000 | $0 |
| Betterment | Add-on human adviser option | $0 | 0.25% |
| Wealthfront | Advanced Indexing for accounts of $500,000+ | $500 | 0.25% |
| Assets management human adviser | Human management | $0 | 1.25% to 1.75% |
| Fee-only human adviser | Human management | Varies | $1,000 to $5,000 |
To manage a basic financial portfolio, a robo-advisor can offer automated management and lower fees. These automated advisers also remove the human elements of error and fear that might hurt long-term financial growth and gain.
However, human management of financial portfolios might be what makes for individualized and customized options. Only a human can get to know you, listen to your gut feelings on investment and understand your dreams for a tropical retirement.
Many popular robo-advisor platforms offer consumers the option to combine both a robo and human adviser for the best of both worlds. But in the end, choosing one over the other depends on your personal preferences, goals and assets.
If you’re a college grad just looking for basic portfolio management with fees that won’t eat away your profits, look into a robo-advisor while you get your feet wet. But if you’re staring down retirement and a six-figure investment, the human touch may get you the most bang for your buck.
