Commonly referred to as robo advisors, these services are gaining in popularity as more people are looking to decrease the amount of fees that they are paying for financial advice and management. They are also highly used by beginning investors who don’t have the assets needed for traditional investment accounts. One of the most attractive features of these accounts is the automatic diversification and rebalancing that allows truly hands-off investing. There are even robo advisors that offer tax-loss harvesting, for an additional fee. This feature will automatically make trades that will help to lower your tax burden.
Depending on the service that you select, payment is either made as a fixed monthly fee or as a percentage of assets. Depending on the size and value of the portfolio, these fees can range from $15 to $200 per month if you are paying a fixed fee. As a percentage of assets, firms typically charge between .15% and .50% on an annual basis. If you are invested in mutual funds, you will also be charged for the expense ratio of the underlying funds. If you are interested in opening a robo advisor account but are wary of the fees, look for one that offers a free trial period during which you can learn more to decide if this is a good choice for you.
In addition to lower fees than their traditional counterparts, robo advisors offer the added benefit of automatic investments. That means that costly mistakes can be avoided as you will not be initiating any trades. Most research reveals that individual investors lose the most assets due to poor trade decisions that are often executed for emotional, rather than sound financial reasons. Robo advisors take you out of the equation and all investing decisions are based on technical data and trading models. You will also avoid costly mistakes due to biases of your financial manager or other unscrupulous trades that many brokers advise based on their holdings.
There are, however, many situations for which a robo advisor is not recommended. For instance, if you receive stock options as part of your compensation, or have a complication tax situation, a robo advisor is most likely not a good solution for your investment portfolio. These accounts are best suited for people with a very straightforward financial situation, such as young professionals that are just starting out, or those with a limited investment portfolio.
If you are interested in an investment option that takes out all of the guess work and is completely hands off, then a robo advisor is probably a good fit. You will save money on fees and will no longer need to worry about the diversification and re-balancing of your investment portfolio. If you are interested in learning more, Betterment, WealthFront, and Asset Builder are three of the highest rated robo advisors. This option is a great way to build your investment portfolio stress-free as you gain more financial and investing knowledge.