The Beginners Guide to Investing With A Roboadvisor in 2021
Wouldn’t everything be much easier if you could just tell someone what your financial goals are, then after a quick nod of the head, they automatically manage your money for a tiny fee without asking any further questions?
That would be amazing, but it doesn’t have to be a dream. In fact, it exists.
What Is A Roboadvisor?
Defining An Automated Digital Platform
That’s exactly what roboadvisors are. They’re automated financial managers that supervise your investments based on a tailored strategy. This strategy will be generated based on the initial series of questions about the resources you have and your long-term financial goals.
Roboadvisors will then use this data to make ongoing decisions on how to best invest your money while factoring in global events, political shifts, and other quantifiable data about the market. All of this is done within seconds.
How Does A Roboadvisor Manage Investments?
Letting The Computer System Pick What’s Best
The idea behind roboadvisors is that they can get you the benefits of active management while allowing you to take a set-and-forget approach to investment, so you don’t have to spend countless hours of your life watching tickers go up and down.
It’s important to remember that the majority of roboadvisors use mutual funds or ETFs to grow your portfolio rather than relying on individual stocks. This is largely done to minimize risk.
Their passive investment approaches are based on modern portfolio theory — the same information that a human advisor would use to make recommendations and guide you through the investment process.
How Much Does A Roboadvisor Cost?
The Nickels and Dimes of a Roboadvisor
The average advisory fee of a roboadvisor is around 0.40% of the total account size. This can range higher at 0.75% with certain providers or go lower to 0.25% with others. As a rule of thumb, eight-figure portfolios generally get lower overall fees since the account is larger.
Account minimums can range from $0 to $100,000 depending on which brokerage you go with so be sure to do your homework before picking one. Even if your roboadvisor has a $0 minimum, always put enough money in to allow for sufficient diversification.
What Features Should A Roboadvisor Have?
Understanding What’s Included With A Roboadvisor
There’s a myriad of features that vary from one provider to the next but a few are too essential to miss out on. Detailed performance tracking is an absolute must since it makes it easier for you to evaluate your financial position as needed.
Effortless account funding is also key since you don’t want to miss out on market rallies just because you have to go through a convoluted or slow process every time you cash in. On a similar note, find a roboadvisor with a good user experience. Roboadvisors that take user experience (UX) into account will be far easier for customers to navigate and manage their investments, thus getting the most out of the platform with a slick customer experience.
Another key feature for any roboadvisor to have is a quick and simple account openings process — this system can make or break the customer experience for many people. No one wants to spend days jumping through hoops before their account gets verified.
What Are The Pros and Cons Of A Roboadvisor?
Benefits and Disadvantages of A Roboadvisor
The biggest pro of roboadvisors is that they provide a viable path of automated investing. This is the best type of passive investing since it has the potential to maximize yield while minimizing the amount of time you have to spend managing your investments.
As you likely already noticed in the above section, roboadvisors charge fees that are pretty low compared to other financial services. Why give 20% of your profit to a hedge fund or pay a huge sum for active managers when robots can match/exceed their results at a fraction of the price?
Of course, there are still some shortcomings to consider. First of all, while technology has made massive strides in the past few decades, it’s not yet at a point where roboadvisors are 100% personalized. They’re also not as helpful emotionally.
During a market crash, human advisors are able to address your fears and talk you out of premature selling — something that cost Hollywood star Michael Douglas half of his massive portfolio back in 2008. You can’t beat the warmth that humanity brings.
Can I Trust A Roboadvisor For My Finances?
Building A Relationship Over Time
Some are reluctant to entrust their hard-earned money to an advisor made up of lines of code. The fact is, robots are pretty trustworthy and reliable. To get the obvious benefit out of the way, they’ll never attempt to siphon money from your portfolio.
Robots are as ethically neutral as it gets. Furthermore, they’re not bound by human emotions and thus can maintain a logic-based investment strategy where us “fleshies” may fall victim to phenomenons like FOMO.
Always use the Investment Advisor Search feature of the SEC to check if a firm is registered before trusting them with your money. This advice applies to anyone availing any financial service and not just those looking into roboadvisors.
Although, there’s no need to panic if the firm goes under as your money is kept completely separate from corporate funds. This means that firms won’t be able to tap into your portfolio to cover their operating costs or similar expenses.
As you can see, there are countless benefits to including a roboadvisor in your overall investment strategy. Technology may not yet be at the point where it’s able to create strategies that are perfectly matched to your specific goals, but there’s still a lot of value to reap here.
The fact that the fees of roboadvisors are so low in comparison to other financial advice services means it will be extremely easy to make a return on your investment. When it comes to bang for buck performance, roboadvisors are tough to beat.
Just know that you probably won’t be able to rely on software to handle the entire process until AI improves. There’ll still be a need for your input from time to time if you want to tailor the investment process. If you really want to take your investments to the next level, then you should also consider using Zinvest.
Active management portfolios strive for superior returns but take greater risks and entail larger fees. As this model yielded significant results over time, we also analyzed volatility as a major risk that could expose many in the marketplace.
With that, we also deployed a passive management strategy that replicated a specific benchmark or index in order to match its performance. This means that Zinvest takes both an active and a passive approach to investing for you.
