Invest Financial Planning

Should You Use a Robo-Adviser?

Nancy Mann Jackson  |  August 27, 2018

As our world becomes increasingly digitized, the investment management has followed suit with online investment platforms, also known as robo-advisers.

As our world becomes increasingly digitized, it’s no surprise that investment management has followed suit— online investment platforms, also known as robo-advisers, are popping up everywhere.

Women are especially taking notice: According to a survey by TD Ameritrade, more women than men currently use a robo-adviser (16 percent of women vs. 10 percent of men).

And as more Americans are taking an active role in managing their finances (60 percent describe their investment approach as “hands on,” according to a Merrill Edge Report), robo-advisers offer an easy, unintimidating tool for doing it — and doing it well.

Rather than relying on (and paying for) a human adviser to suggest and make changes to your investment portfolio, these platforms use computers, crunching complex mathematical algorithms to automatically adjust your investments and create affordable investment portfolios. In some cases, the platforms use “hybrid” investing, which relies on a combination of expert insight and online management.

Below, we explore the pros and cons of using a robo-adviser— and which ones to try out, should you decide to take the plunge.

Pros of Robo-Advisers

Of course, robots can’t take the place of humans. But when it comes to investing, some people think they offer unique advantages to human advisers. Here are just some of the benefits of robo-advising:

  • Invest with just a little. “Many financial advisers give off the vibe that they won’t get out of bed for less than $1 million in assets, and we don’t all have that lying around,” says Kerri Moriarty, a financial adviser for Cinch Financial, a new financial software platform. “Many robo-advisers let you start investing with affordable fees for significantly less.”
  • Avoid human bias. “Humans inevitably incorporate a significant amount of bias into the decision-making process,” says Bert Mouler, founder of Profluent Capital, a robo-advisory firm in San Francisco. With automated advising based on mathematical formulas, you avoid that bias and make investments or trades based on data.
  • Save money. In most cases, robo-advisers are much cheaper than human advisers, which means that you spend less on fees and have more money to invest, growing your portfolio more quickly.
  • Avoid personality differences. The average financial adviser is nearly 60 years old — and usually male — which may make it hard to relate to the situations that women clients face. Moriarty explains: “I’m not sure (that the average adviser) has had to live through the decision of whether or not to continue working after having children or how to think strategically about the impact of that decision on my retirement and financial future. Not to typecast all older male advisers, but there is certainly an appetite for financial advice coming from someone — or something — a little more modern and in sync with the way I live my life. Cue robo-advisers.”

Cons of Robo-Advisers

Although automated platforms offer many advantages, they aren’t perfect. Some of the disadvantages of robo-advisers include:

  • It’s hard to get a handle on your overall financial situation. In most cases, robo-adviser technologies are focused on investments and retirement, not usually on getting out of debt or building an emergency fund. “Longer term planning is important, but it’s less relevant if you’re not in a stable position today,” Moriarty says. “At least a human adviser can give you some insights on solving for the short term before turning to longer-term strategies.”
  • You don’t get personal advice. Yes, we’re all rational people, but there is always “a huge emotional component involved” when it comes to finances and investing, Moriarty says. “Working with a human adviser can really help balance your logical perspective with your emotional one when it comes to considering any financial decision. That nuance is certainly a bit harder when you’re interacting strictly with technology, like a robo-adviser.”

Increasingly, investing platforms are finding ways to combine both personal and automated services to help diminish the disadvantages.

Trying It Out

Want to try your hand at robo-investing, or find a hybrid of automatic and expert financial management? Here are several of the leading platforms to consider.

Focused on micro-investing, Acorns makes it easy to invest a few cents or dollars whenever you can (the app rounds up every purchase to give you regular contributions) and manages the resulting investment account to boost your net worth.

Another robo-adviser, Betterment uses a diversified portfolio and automated rebalancing to earn high returns.

Merrill Edge Guided Investing
Merrill Edge Guided Investing is an easy, low-cost way to invest online, combined with a professionally managed portfolio.

Personal Capital
Personal Capital’s free personal finance tools include a free retirement planner, and the site also offers automated portfolio management services, for which they charge a fee.

Profluent Capital
An artificially intelligent portfolio management system, Profluent Capital uses algorithms to automatically analyze various portfolios, select which instruments to trade, and design trading systems.

TD Ameritrade Essential Portfolios/Selective Portfolios
TD Ameritrade’s Essential Portfolios and Selective Portfolios are also great options. Essential Portfolios offers a digital-first robo-adviser, while Selective Portfolios pairs a robo-adviser with human contact.

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