Robo Advisors can be a great idea for the right person. They are essentially automated financial advisors who use algorithms and computer programs to manage your investments with minimal human input.
This makes them ideal for those who don’t have the time, resources, or expertise to do it themselves. Robo Advisors typically charge lower fees than traditional financial advisors, offer more diversified portfolios, and provide more tailored advice and strategies for individual investors. They are also incredibly convenient; all you need to do is enter your information once, and the algorithm does the rest.
The downside of Robo Advisors is that they don’t provide you with a personal financial advisor who can give you customized advice or consider your unique situation.
Robo Advisors are a good idea if you want these 8 benefits:
- Many Robo Advisors are tuned for optimal tax-loss harvesting – saving you money.
- Robo Advisors are tuned for automatic portfolio rotation & adjustment – saving you time.
- Automatic balancing of a portfolio based on your risk profile – reducing your risk
- Provision of low-cost access to ETFs & Mutual Funds – reducing trading costs
- Some Robo Advisors provide model portfolios for socially responsible investing.
- Robo Advisors allow for gender or life-stage-specific portfolios – providing a personalized portfolio.
- All Robo Advisors provide instant access to your investment performance – transparency.
- Hybrid Robo Advisors allow you to talk to a human account manager – the human touch.
The 8 Big Advantages of Robo Advisors
1. Many Robo Advisors are tuned for optimal tax-loss harvesting – saving you money
Some but not all Robo Advisors incorporate tax-loss harvesting into their automated portfolio management. If you have done private investing before, you will know that tax planning on your investments can be a significant burden at the end of the year. You are compelled to sell any losing stocks; you may have to be able to offset your taxes against the loss.
As Robo Advisors are usually highly automated, they can run the relevant algorithms to optimally offset elements of your portfolio to minimize your tax burden for the year.
A good Robo Advisor service like M1Finance will deliver the following documents after the year-end, usually in January:
- Tax Form 1099-R
- Tax For Consolidated 1099
- Tax Form 5498
2. Robo Advisors are tuned for automatic portfolio rotation & adjustment – saving you time
Nearly all Robo Advisors are based on the principle of Modern Portfolio Theory (MPT), a widely utilized methodology for assigning weighting to different types of financial assets to achieve the optimal balance of risk versus reward.
Employing MPT allows the Robo Advisor service to automatically adjust your weighting in different assets, like stocks, bonds, currencies, and mostly ETFs, to ensure an appropriately diversified portfolio.
The process is designed to offset risk through diversification. Still, one of the problems with that approach is it can also offset a lot of rewards, as most Robo Advisory services fail to beat the underlying market index, usually the S&P500 index.
3. Automatic balancing of a portfolio based on your risk profile – reducing your risk
For example, you may be close to retirement and decide to minimize your risk of loss in a stock market crash. In this case, you would want perhaps to have 80% of your portfolio in bonds and 20% in stocks and ETFs.
Robo Advisors will automatically perform the readjustment of your portfolio based on your risk profile. Some allow you to select the weighting of assets, but others offering even greater levels of simplicity will let you answer a few questions and make the adjustments for you.
4. Provision of low-cost access to ETFs & Mutual Funds – reducing trading costs
Most Robo Advisors will buy and sell Exchange Traded Funds (ETF) on your behalf. Here, it would be best to be careful, as not all robo-advisors are created equally. Not all are low cost, and many, especially the bigger names like Vanguard, Schwab, and Fidelity, may charge a management fee, fill your portfolio with the ETFs they manage, and charge an additional ETF fee.
[Related Article: Find out more about the fees and costs associated with Our Robo Advisor Comparison]
5. Some Robo Advisors provide model portfolios for socially responsible investing
As a person who eats organic food, is practically vegetarian, and cares about the environment and the social impact of capitalism, I find a key benefit of the Robo services is socially responsible investing portfolios. Companies such as Ellevest, Betterment, and TD Ameritrade enable you to bypass the burden of researching the background of every company you invest in by offering pre-structured socially responsible portfolios.
Other companies, such as M1 Finance, go even further by providing hundreds of different model portfolios (they call Pies) so that you can mix and match your portfolio based on a collection of pies.
6. Robo Advisors allow for gender or life-stage-specific portfolios
In a world unfortunately still dominated by men, Ellevest seeks to breathe fresh air into the stuffy male-dominated investment industry. The unique selling point and the niche market that Ellevest has carved out is focusing on the unique needs of women. Interestingly, women live longer than men, usually have a career break for children, and earn less than men; this means that women require different advice more suited to their life events.
7. All Robo Advisors provide instant access to your investment performance
Of course, this is something you would expect; the transparency of seeing how your portfolio is balanced and the return on investment you are getting is paramount.
M1 Finance gives you a very good insight into how your portfolio is balanced and what assets you own.
8. Hybrid Advisors allow you to talk to a human account manager
A Hybrid Robo Advisor service essentially adds some traditional customer service to the mix. This means you will have telephone access to a registered financial advisor to discuss your situation, preferences, and questions.
Of course, this higher level of personalized service usually comes with additional fees. Betterment, Ellevest, Morgan Stanley, TD Ameritrade, Vanguard, and Fidelity all offer this service. See our Robo Advisor comparison for more granular details.
Are Robo Advisors A Good Idea?
As you can see, a Robo Advisor is a very good idea because you can save time managing your tax-loss harvesting, ETF, and asset selection and automatically reinvesting towards your retirement. You can also save money because, often, Robo Advisory will optimize your tax-loss harvesting and minimize your trading costs.
The downside is that most Robo Investment services fail to beat the market, meaning they do not provide higher returns than simply investing in a single market-indexed ETF, e.g., the S&P500 index. Many claim that beating the market is unimportant and that minimizing risk is the most important; you can decide what is most important for yourself.
Let us know your thoughts in the comments section below.