Is a Robo-Advisor a Good Investment Manager?

GRAYLL
GRAYLL
Jun 29 · 3 min read

If you ever grew up watching The Jetsons, you probably dreamed about having a robot to clean your room or walk the dog when you weren’t in the mood for it. With robo-advisors, that idea seems more and more appealing.

Still, while these robots may not be doing any pet-sitting or window cleaning, they have a lot to offer — and that is a way to invest. In a world where human error is the cause for many financial failures, a robo-advisor is a great way to manage your investments better.

How Does a Robo-Advisor Work?

A robo-advisor — also referred to as an online advisor or automated investing — will use advanced software or computer algorithms to manage your financial portfolio. The services of a robo-advisor will range from tax optimization to automatic rebalancing and barely require any human interaction.

Since they offer barely any minimums (or none at all), and they come with low costs, robo-advisors will allow you to get started very fast. Usually, it will only take a few minutes to get results and answers — which is why robo-advisors are such a time-efficient tool.

How Much Does a Robo-Advisor Cost?

A robo-advisor will certainly be much more affordable compared to a human financial advisor. Most of the time, companies will charge around 0.25%-0.89% of the annual management fee — usually, that fee goes well under 0.5%. You pay this tax as a percentage from the assets that are under the care of a robo-advisor.

For example, if your account balance is $10,000, you may have to pay around $25 every year for the robo-advisor. This fee will generally be taken automatically out of your account, either quarterly or monthly.

Generally speaking, you will not be paying any transaction fees with robo-advisors. When it comes to standard brokerage accounts, you may be required to pay a commission when it comes to buying or selling investments — but in the case of robo-advisors, these charges are usually waived.

What Can You Expect from Robo-Advisors?

Each robo-advisor may have its unique features — but most of the time, the formula is pretty much the same. All of them try to automate investment management services so that everything may be resolved by a computer with minimal costs. With the standard robo-advisor, you may expect the following:

· Regular rebalancing for your portfolio, no matter if it is automatically or on a chosen interval (e.g. quarterly).

· Tools for financial planning (e.g. retirement calculators).

· Tax-strategy offerings such as tax-loss harvesting on a taxable account.

You can come across hybrid services as well — robo-advisors that also use the collaboration of human advisors. These can be quite effective, as they can detect errors better — but are also more expensive compared to standard robo-advisors.

The Bottom Line

In a technology-based society, robo-advisors have proven to be very useful. They improve the quality of your financial portfolio, particularly when you have a small investment that needs financial attention. They may not be entirely free — but they represent the more price-friendly option when compared with human financial advisors.

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