Robo advisors provide an affordable and hassle-free way to begin investing towards your goals, with lower minimum portfolio balance requirements than traditional wealth managers.
Robo-advisors will ask you questions online or through an app about your goals and risk tolerance in order to tailor a portfolio that best meets them.
What is a Robo Advisor?
Robo advisors employ an automated investment strategy to oversee your finances. You set your investment goals, and the robo advisor uses programming to construct an individual portfolio comprised of stocks, bonds and cash investments tailored specifically to you. In addition to this, it rebalances at regular intervals or as needed.
Once you’ve set up an account with a robo advisor (which usually involves making an upfront deposit and connecting your bank account), a short questionnaire will ask about your goals, time horizon for investing and risk tolerance.
Robo advisors use algorithms to recommend an appropriate portfolio mix of exchange-traded funds (ETFs) that fits with your investment goals and timeline. After making its recommendations, it monitors markets to make necessary adjustments. It may also recommend diversification strategies in order to mitigate against all-at-once failure of one investment – usually at lower fees than human financial advisors with often lower minimum deposit amounts as well.
How Does a Robo Advisor Work?
Robo-advisors employ both human guidance and computer software to manage your investments. First they assess your goals, risk tolerance and investment time frame with an online questionnaire or guided assessment, followed by selecting an asset allocation mix comprising stocks, bonds and uninvested cash that best meet these criteria.
Robo-advisors then utilize this data to create a diversified portfolio of funds for you, usually ETFs with lower management fees and turnover rates, which may produce lower capital gains taxes than traditional mutual funds.
Many robo-advisors provide both active and passive investing strategies. With active investing strategies, experts utilize research and experience to attempt to beat market indexes through stock selection. With passive strategies, a computer algorithm tracks market activity to determine when your portfolio should be rebalanced by replacing winners with losers without any input from you.
How Does a Robo Advisor Help You?
Robo advisors can help you manage risk in three key ways. First, they provide diversification that could lower the risk of loss by spreading investments among different stocks or bonds (though this does not guarantee profit or protect against losses).
Investment platforms also provide easy-to-understand strategies with straightforward rules, making investing simple for anyone based on your unique financial circumstances and goals. Fidelity Go, for example, asks users to rate their risk tolerance before providing recommendations of stock and bond ETFs that correspond with that score.
Robo advisors use computer algorithms to regularly rebalance your portfolio to stay within its original allocation, typically charging much lower fees than financial advisors do. While robo advisors may offer regular rebalancing of your accounts using regular rebalancing, human support for technical or account issues is limited compared to what traditional advisors can provide and they cannot meet complex financial needs such as estate planning or trust fund administration.
What Are the Benefits of Using a Robo Advisor?
Robo advisors may be an attractive solution for investors who wish to reduce management fees or don’t have enough time to manage their own portfolios themselves. Robo advisors typically offer a diversified portfolio of low-cost exchange-traded funds (ETFs) and mutual funds, including diversification by asset class.
Investors can quickly sign up for a robo-advisor online by filling out a questionnaire revealing their goals, investment time horizon and risk tolerance. Once this data has been processed through an algorithm it generates a tailored asset allocation plan.
Robo-advisors not only offer a diversified portfolio but can also rebalance it as part of their services, selling assets to offset capital gains while buying them back later to restore balance in your portfolio. Some even employ tax loss harvesting strategies in order to mitigate short-term capital gains recognition.
Robo-advisors may not be suitable for people requiring personalized guidance to manage complex financial situations such as inheritances, major purchases and life events that necessitate detailed planning. Although some robo-advisors allow you to connect all your accounts, their ability to provide guidance from human advisors cannot compare.
