What to Know about Robo-Advisers
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How much control do you need for your financial future? Financial advisers typically work with clients to build a cohesive financial plan. But another option would funnel those decisions through an algorithm—cutting out the human broker at a lower cost.
Welcome to the world of robo-advisers: automated, non-human investment advisors.
The term “robo-adviser” typically includes any investment advice provided digitally—through a computer, smartphone, or other digital device. Robo-advisers don’t use literal robots—but they do involve complex formulas to develop an investment plan.
An investor typically fills out a questionnaire, and the robo-adviser creates an investment portfolio. Robo-advisers can provide investment advice at a lower cost than traditional human investment advisers—but they have limitations.
For example, robo-advisers may have fewer investment options, or may be restricted to only exchange-traded funds.
Using a robo-adviser has benefits and risks. Even if you manage your investments through a robo-adviser, you should still know how your funds are invested, and who (or what) ultimately decides where to place your money.
Robo-Adviser Pros and Cons
| Pros | Cons |
|---|---|
| Robo-advisers typically cost less than traditional advisers. | Robo-advisers often rely on pre-configured investment options, limiting investor customization. |
| Robo-advisers usually don’t require high initial deposits to open an account. | While some robo-advisers offer access to humans for customer service, most don’t offer in-person guidance or personalized advice for specific financial questions. |
| Some robo-advisers minimize taxes from investment gains by offsetting taxes from losses. | Robo-advisers create portfolios from user questionnaires, but they might not accurately represent the customer’s goals and objectives. |
| Robo-advisers offer convenient, instant portfolio access through smartphones or tablets. | Robo-advisers often lack financial planning services beyond portfolio development and management. |
Robo-Adviser Q & A
If you’re considering a robo-adviser, ask yourself these questions before signing up:
- How much will it cost?
- Fees vary among different robo-advisers. Many charge ongoing assets-under-management (AUM) fees based on the available money in your account.
- Research how potential robo-advisers charge fees, as each may have different fee structures. Watch for additional fees, such as trading fees, transaction fees, or flat fees.
- What are the minimums to open and maintain an account?
- Each robo-adviser requires different minimums when opening an account, and some require no minimum at all. However, robo-advisers may assess fees (or require recurring deposits) if you don’t meet certain account balances.
- Make sure you understand account minimum requirements to avoid extra fees.
- Can I contact a real person with questions?
- Robo-advising is an electronically-centered service. The relationship to your robo-adviser may differ from a traditional advisery relationship.
- A traditional investment adviser may periodically contact you about your account. However, robo-advisers may limit human adviser contact.
- Research the limitations of your robo-adviser before entering an advisery relationship.
- Have you looked beyond the robo-adviser’s website?
- Conduct research beyond reading from the robo-adviser’s own website. Make sure your prospective investment adviser is appropriately registered to do business in your state.
- Review the full text of the client contract to understand the boundaries of the client relationship.
- Review each robo-adviser’s brochure from the SEC’s website.
- Do you know the risks and limitations?
- Investing always has some risk. A robo-adviser has unique risks, because of its platform and investment products.
- Read the brochure section of the adviser’s Form ADV, which covers its investment business practices and risks.