What Are Robo-Advisors?
Updated on June 17, 2019
If you’ve always wanted to invest but felt the time and research necessary to do so was too overwhelming, you’ll want to get whyze and learn about robo-advisors . Robo-advisors provide a relatively low-cost and “hands-off” solution to investing .
Historically, this solution has not always been available. Before the times of robo-advisors, you were limited to only two options:
- Investing On Your Own
- Having A Financial Advisor Do It For You
While managing your own investments provides the highest level of flexibility and the lowest cost to invest, it often requires time and research if you want to do it right. In the past, if this time commitment didn’t work for you, you’d be left with the option of finding a financial advisor.
Unfortunately, many financial advisors only service the wealthy. And if they do work with non-wealthy clients, they tend to charge high annual fees that slowly eat away at their profits. Financial advisors are also not fiduciaries, meaning they may offer you investments that make them the most commission instead of the ones that are best for your money. This often leads to many people failing at investing on their own or deciding not to invest at all.
Luckily, investors now have the option of low cost robo-advisors that automate investing.
How Do Robo-Advisors Work?
So, exactly how do robo-advisors work? After completing a short survey about your investment goals, personal information, and how much risk you’re willing to take, robo-advisors use your answers to automatically build and manage your investment portfolio . In return for automatically handling your investments, robo-advisors charge you an annual management fee.
Which Robo-Advisor Should I Choose?
While this is generally how all robo-advisors work, each robo-advisor is slightly different. When choosing the best robo-advisor for you, you’ll want to compare these key details:
- Account Minimums
- What Funds Are Offered
- Additional Services
Fees associated with robo-advisors include annual management fees and expense ratios.
Annual management fees are what you will pay your robo-advisor on a yearly basis for their service. As an example, if your robo-advisors’ management fee is 0.5%, they will subtract this amount from your account once a year. If your investments gained 10% that year, your account will rise by 9.5%. This is because you automatically paid your yearly management fee.
The second fees you’ll pay are expense ratios.
Expense ratios are the fees you have to pay for being invested in a mutual fund, index fund, or ETF. Since these are the funds a robo-advisor will invest your money into, you will have to pay these fees as well. This is where robo-advisors can get a little costly if you’re not careful. For instance, if your robo advisors’ management fee is 0.5% and the net expense ratio of the fund your money is invested in is 0.5%, you will pay a total of 1% each year in fees.
Although both of these fees are paid automatically and won’t require any action from you, you’ll want to make sure you are keeping your management fees and expense ratios low. These small fees can add up to a large amount of money over time.
Robo-advisors also vary in account minimums. Minimums can range anywhere from $0 to over $25,000 just to open an account.
What Funds Are Offered
You’ll also want to check the specific funds your robo-advisor invests your money into. Each robo-advisor has a different set of funds they use and will typically list them on their website. A quick search on the internet of a specific fund’s name will show you how well the fund has performed in the past. This search will also show a fund’s expense ratio. Compare both to ensure you are choosing the robo-advisor with the best performing funds that will cost you the least amount of money.
Robo-advisors may also provide additional services such as access to human or automated financial advisors, funds that only invest your money in companies that are socially responsible, automatic rebalancing of your investments, and tax loss harvesting which involves selling losing investments and using these losses to reduce or eliminate taxes you owe.
Each robo-advisor may also offer their own special promotion for opening an account. Depending on which robo-advisor you choose and how much money you deposit, promotions can range from no management fees for a specific amount of time to cash rewards and gift cards.
Should I Use a Robo-Advisor?
If you decide robo-advisors are right for you, make sure to be whyze and compare the important details! Luckily for you, we’ve made this easy to do right on the Whyze website! We’ve done the research, sorted through the details, and have created a list of the best robo-advisors available.
You can check it out for free by going here.