There's a new investing and personal finance resource out there: Robo Advisors. They're gaining in popularity and media attention, but is a robo advisor a smart option for you? It just might be.
To back up a bit, think about your financial life, and how you have to manage so many things, such as your retirement planning and saving for emergencies, college expenses, a down payment on a home, a new car, and retirement itself. Think about how you need to make smart decisions with your credit cards, your banking, and your charitable giving.
Think about how you want to invest effectively, not taking on too much risk, but not settling for unnecessarily low returns, either. Think about how you need to make your paycheck -- or two earners' paychecks -- support you while getting you to all your goals. It's a tall order for mere mortals, right?
The daunting scope of all the money managing that most of us need to do is what sends many people to financial advisors. That's a smart move, especially if you use a fee-only advisor -- perhaps via www.napfa.org -- who won't recommend investment moves for you that will generate commissions for him or her. Some advisors might seem too costly, charging hundreds of dollars or several thousand dollars for a comprehensive assessment and guidance; but remember that they may be saving you much more than that -- or helping you earn much more than that.
Faster and cheaper...
Enter robo advisors, which are websites where you sign up, enter your financial particulars, and benefit from the site's tools and computer models. Some suggest how you should invest your money, while others will do it for you. They tend to focus on exchange-traded funds (ETFs), which are great ways to invest in stock- and bond-market indexes inexpensively.
They're also cheap, at least relative to human financial advisors, some of whom will charge you an upfront 5% fee, or perhaps 1% of your assets annually. Many robo advisors charge between 0.15% and 0.50%, with some charging a lump-sum fee instead, or in addition to that. A difference of a single percentage point is like earning an extra point on your annual return, and can be quite powerful. During the course of 25 years, for example, a $100,000 portfolio will grow to $1,083,000 at an annual average of 10%, but only $862,000 growing at 9%.
Why you should go robo
If you're simply not doing a good job of managing your money, or would welcome relatively inexpensive guidance on the matter, give robo advisors some consideration. Read more about them, though, as there's a wide variety of them offering different and often overlapping services, while charging a range of fees.
Some will make investment recommendations for you, while others will take over just about all of the management duties, including rebalancing over time, reinvesting dividends, and shifting assets from one category to another as you age. Some even handle tax-loss harvesting. Robo advisors are particularly suited to younger investors with simpler financial profiles.
As you shop for the robo advisor best suited to your needs, consider the services each contender offers, the fees charged, and any other appealing unique features. Some, for example, will let you shift from simpler services to more intensive ones -- such as human advisors, possibly -- when you need that. You can get a sense of how nuanced a service is by what kinds of questions you're asked. If you're only giving your age and income, the system might be too simplistic. Note, too, that while most can handle taxable brokerage accounts and IRAs, not all will handle SEP IRAs, which self-employed folks often use.
Some of the big names in robo advisors and companies very much like them include Wealthfront, Personal Capital, Betterment, Jemstep, FutureAdvisor, LearnVest, AssetBuilder, Covestor, Financial Guard, Market Riders, iQuanifi, Motif Investing, Liftoff, SigFig, and Rebalance IRA. Note, too, that many big financial services companies you're familiar with, such as Vanguard, have their own robo advisor services, or may be looking into launching one.
Why you might pass on robo advisors
Despite all there is to like about robo advisors, you might still want to pass. You might prefer, for example, to interact with a live human being, face-to-face. There are advantages to that because, in person, you can have a more nuanced conversation with a financial advisor. He or she may get a better sense of your needs from a conversation than from a handful of numbers, or a few answers to some multiple-choice questions. Also, if your situation is complex, human help is likely to be better than automated help.
Alternatively, you might pass on robo advisors because you want to manage your money on your own and save the fees they would charge you. That can be perfectly reasonable, too, especially if you aim to buy and hold a few inexpensive broad-market ETFs, such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, and Vanguard Total World Stock ETF. Respectively, they invest you in the largest 80% of the U.S. market, the entire U.S. market, or just about all of the world's stock market.
You might also include a broad bond index fund, such as the Vanguard Total Bond Market ETF. Lifecycle or target-date funds are another option. Each is based on an expected retirement year, and will take care of asset allocation for you, shifting your money from stocks toward bonds as you age.
If you can't decide...
If you're intrigued, but not sure whether you want to try robo advisors, consider doing just that -- trying them. Don't fork over most or all of your nest egg, but instead try one or two out with relatively small sums, such as $10,000. See how your money is invested and handled, and how comfortable you are with each service.
Whether you use a robo advisor or not, it's good to be familiar with them and what they offer.