Want to jump into the investing world, but aren’t sure about picking out your stocks and managing your own portfolio? An automated advisor can do all of that for you.
A robo-advisor is a digital platform that uses computer algorithms to build and manage a diversified portfolio based on your risk tolerance, financial goals, and other personal factors. It also automatically rebalances your portfolio based on market conditions and your investment objectives. While this sounds neat, a bot advisor can pose some significant risks. Before you invest, you need to weigh the pros and cons.
Benefits of an automated advisor
The popularity of bot advisors continues to grow. According to a study by international consultancy Deloitte, assets under management with the support of robo advisors could grow to more than $16 trillion by 2025 — about three times that of BlackRock, the world’s largest asset manager. In fact, robo-advisors may offer several features that will appeal to investors looking for a laissez-faire, no-hassle approach.
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costsA human financial advisor may charge a fee for assets under management (AUM) of 1% or higher. The Robo-Advisor’s AUM fee can range from 0% to 0.40%. To put that into perspective, the 1% annual AUM fee on an investment of $10,000 goes up to $100. The 0.25% AUM fee on an investment of $10,000 is just $25 per year.
diversification: Most of the bot advisors provide you with a questionnaire about your financial goals, risk tolerance and more. The algorithm uses these answers to recommend an investment mix.
Automatic rebalancingMarket conditions can shake up your investment mix, and may leave you too focused on one asset class — leaving you exposed to significant risks in the event of a downturn. When this happens, automated advisors rebalance your portfolio back to its original investment mix, sometimes by selling investments that have gone up and using the proceeds to buy those that have gone down.
The downside of robo-advisors
Despite the hype, bot consultants have their potential drawbacks:
hidden costs: Although bot advisors charge much lower management fees than traditional advisors, your money is still swallowed up by Expense ratios Or the fees charged by the funds in your wallet. Some may argue that you can simply open a file Discount brokerage account And invest in these funds yourself, completely avoiding AUM fees. There are plenty of online asset allocators that can recommend a customized investment mix, similar to how an automated advisor uses a survey.
fluctuating fees: Some bot advisors may increase their AUM fee as your balance increases. The more you invest with them, the larger the stake they take.
A little human interaction: If you’re on a paid plan or pay an extra fee, some bot advisors give you access to financial planners who can help you achieve other financial goals like paying off high-interest debt. But many plans do not provide access to human advisors at all. For those looking for a hybrid service that allows you to talk to a human consultant when you want to, your options may be limited.
Is an automated advisor right for me?
If you are comfortable with handing investment management over to advanced algorithms and specialists, and accepting limited investment options for potentially low fees, then an automated advisor may be in your pocket.
But if you are experienced or have little time to build your investment acumen, building and managing your own portfolio may be a better bet.
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The fraudulent shareholder Javier Simon has no financial position in any of the companies mentioned. Motley Fool has a profile Disclosure Policy.