July 8, 2016
You're looking to grow your money, but you're not quite sure how to get started.
Should you go robo?
Robo advisor, that is. A robo advisor is a digital investment management service that allows you to input your funds, financial data and investment preferences online and designs algorithm-based recommendations based on your responses. While a human advisor may charge one percent or more of your invested assets to help you manage your money, robo advisors typically charge only a fraction of that amount in management fees. Some allow you to open an account with only a few dollars, and others don't even require a minimum deposit to open an account.
Major investment firms have entered the growing robo advisor market with their own computerized services. As new advisor options emerge and evolve quickly, it's a good idea to consider all options carefully. Examine the services industry experts (http://www.investopedia.com/articles/personal-finance/011916/5-best-roboadvisors-investors-2016.asp) provide to know what you should look for in an advisor.
Here are some considerations to factor into your research on robo advisors as you evaluate whether they are right for your needs.
1. Reasonable management fees and small initial investments. Robo funds often have preset investment choices based on client questionnaires about risk tolerance and investment goals, and they typically charge lower fees than human advisors. Human advisors may charge upwards of one percent of all the money you have in your account, while robo advisor pricing options are typically a fraction of that.
2. The best robo advisor sites are streamlined and simple. Good robo advisor sites provide clearly organized, straightforward advice. For example, one of the leading robo advisor sites makes sure you have an emergency fund in place before you start selecting investments. That's the kind of good financial practice you should look for in an advisor, robo or not.
3. Federal regulators are still evaluating robo advisors. The Securities and Exchange Commission has its own recommendations for investing with robo advisors, but the most important unanswered question is whether robo advisors (and the companies that own them) really exercise fiduciary responsibility by truly putting the needs of the investor first. It's essential to understand the risks involved with entrusting your investments to the robo advisor market, where restrictions and consequences are still not completely clear.
4. As major investment firms and even banks enter the market, it's likely that more diverse options in advisory services and pricing will emerge. As big investment names are starting to offer their own robo advisor options for small investors, different robo advisor providers will likely start to differentiate their marketing, services, and fees. It's always smart to shop around for the best deals and fit for you.
5. Robo advisors are no substitute for a basic personal finance education. It's easy to sign up for a robo fund or even find a fee-only financial planner, but it's still important to cultivate your own financial knowledge. Consider public resources on basic financial topics, the range of money management resources offered on Practical Money Skills for Life, or workshops at your community college or public library. Self-education is the most powerful tool for any endeavor, but it's especially essential to handling your finances.
6. Robo advisors aren't capable of providing truly personalized investment advice. An algorithm can't ask countless questions about your long-time financial goals and values or answer all of your queries during a major market change. Though robo advisors provide a low-cost way to get started in investing, you won't have someone who can give you personal advice when unexpected situations arise. Before you sign up, take some time to consider how much personal assistance you think you'll need.
Bottom line: Like most computerized services, automated financial advise and investment planning will probably get more sophisticated with time. But while robo advisor services allow lower initial investments and fees, it's important to study the pros and cons first.
Recent Practical Money Matters