Once upon a time, there was a world where the term robo-advisor didn’t even exist. Now everywhere you turn, there’s a new batch of robo-advisors popping up, eagerly hoping to help you manage your money.
What are robo-advisors? They’re online investment services that use computer software to manage your portfolio. Robo-advisors offer low fees, promise high returns, and require minimal effort.
Long gone are the days of figuring out how to invest on your own or having to pony up for a high-priced financial investment advisor. Robo-advisors are shaking up financial services in ways we couldn’t imagine.
Investing Meets Tech
Investing no longer means stuffy suit types hanging out on Wall Street. Robo-advisors are at the union of investing and tech, and many new startups are moving into the robo-advisor space. In just a few short years, we’ve seen the birth of Betterment, Wealthfront, FutureAdvisor and more — all robo-advisors, that promise the highest returns, with minimal fees and next to no work involved for you.
Even Charles Schwab got in the game recently with their Intelligent Portfolios, with a tagline that cements robo-advisors place in history, “Investing has changed forever”.
Robo-advisors are taking financial services into the 21st century and marketing themselves as low-cost alternatives to the usually high-priced financial investment advisors. By nature, robo-advisors have little to no human interaction. The way they manage assets is through a scientific algorithm that is calculated after assessing your risk tolerance — many of them using Modern Portfolio Theory.
According to Investopedia, Modern Portfolio Theory is, “A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward”.
On one hand you can start investing with little to no knowledge of how investing works — on the other hand, it can be easy to stay ignorant about investing when you have a robo-advisor managing your assets.
Investing for Gen Y
It’s been pretty clear that many of these new robo-advisors are heavily geared towards Millennials who are just starting out with investing and/or have very little assets. Many Millennials wouldn’t be ideal candidates for traditional financial investment advisors (because of the minimum account balance), so robo-advisors have come in to help bridge that gap.
Millennials, many of whom are dealing with the burden of student loan debt, are looking for financial advice online. Let’s face it, many Millennials grew up online or came of age when the internet just started. It only makes sense that these robo-advisors would form and meet Millennials where they are — which is online and connected.
Robo-advisors are democratizing investing, making it easier for just about anyone to get started, even with a small amount of money.
For example, Betterment has no account minimums and you can start investing at $100 per month. If you can’t swing that, you can do less for a flat $3 per month fee. This is a stark change from the sometimes hefty fees and minimums that traditional financial investment advisors are used to.
Changing Perceptions
I really believe that with the rise of the robo-advisor, we’re starting to see a shift in how people perceive investing, at least with the Millennial generation. Investing has become more accessible and it’s no longer relegated to people with large assets and access to a financial investment advisor.
When I think of investing now, I no longer think of money hungry sharks on Wall Street. I think of robo-advisors and hip new startups looking to help the younger generation manage their funds, so we too can get a chance at retirement.
But as perceptions shift, there is still some level of skepticism. Can robo-advisors really replace a human financial advisor? There is still some serious doubt and who can blame the skeptics? Time is the true test for any product or service, so we will see where the rise of the robo-advisor takes us.
Have you used a robo-advisor? What has been your experience?
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.
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This is a good development, because so far the robo-advisors are recommending index funds. Sure, you are still paying a bit for the service but at least it’s much better than many of the human advisors who charge you a high AUM plus recommend underperforming active funds.
When I got a call from a big bank offering this robo service, they told me they would charge me $7500 annually and make less than I had made when asked what an aggressive account would yield ytd. I would have ended up with a deficit to my account.
I worked all the numbers, and figured out I could do better. Thankfully I have. Research has made all the difference.
To know if you get good advice from a Robo-Advisor takes the same amount of knowledge, than to know if you get good advice from a human.
But apart from that they sound like a great idea.