Automation has infiltrated nearly every facet of our lives — but in the realm of managing money, the robot invasion is a welcome technological development. Where traditional money managers rely on their individual expertise to pick and manage investments for client portfolios, a robo-advisor uses computer algorithms to scour the world of investment options, calculate all the possibilities, and curate the ideal mix of investments for investors.
These automated investment services are built with the kind of technology that would make the geekiest mathlete salivate. The investing models robo-advisors use feature an extraordinary level of complexity factoring in reams of research, theory and rigorous back-testing and forecasting of real-world investing scenarios. But it’s the seamless, easy-to-use interface that makes robo-investing an appealing option for investors looking for low-cost, easy ways to invest.
6 Reasons Robo-Advisors are Becoming Popular
In five years, assets under management by robo-advisors will increase 68 percent annually to about $2.2 trillion, according to consulting firm A.T. Kearney. Put another way, it’s predicted that by 2020 robo-advisors will control 5.6 percent of Americans’ investment assets, up from 0.5 percent today.
What’s the rush to robo-investing? Here are six reasons why automatic investing is becoming more and more popular with investors.
1. Robo-Advisors are Easy to Use
To get set up with a robo-advisor you’ll need to answer a few questions online about your age, income, goals and risk tolerance. Then, you either fund your account or link up to existing brokerage accounts. From there, the service’s software will choose the best investments based on your unique profile.
Related: The Best Robo-Advisors
2. Robo-Advisors Use Proven Long-Term Investing Strategies
At its core, robo-investing adheres to the model of creating a low-cost diversified portfolio. This is a good strategy as study after study shows the key to building long-term wealth is to put your eggs among many baskets and keep investing costs — like fees and taxes — to a bare minimum.
3. Your Money is Actively Monitored
Once your money is deployed, you get to sit back and relax while the tech does the heavy lifting. Many robo-investing firms regularly rebalance your portfolio to maintain the optimum level of diversification. Another bonus offered by many robo-investing firms: the ability to automatically reinvest dividends investments earn, and effortlessly add more money to your account. That way, you don’t have to remember to put the check in the mail.
4. Investment Fees are Kept in Check
If you’re just starting out and have a portfolio that hasn’t reached molehill dimensions, the last thing you want is to sacrifice a chunk of your hard-earned money to cover fees. Robo-investing companies actively avoid investments with excessive fees. Most use ETFs or other financial instruments with very low expense ratios.
Compare that to the mutual fund industry average expense ratio of 1.02 percent for all funds in 2014, according to a fee study by mutual fund tracker Morningstar. Remember, every single dollar you pay in fees is less money left to compound in your portfolio.
5. Robo-Advisors Help You Dodge the IRS
In addition to making complex investing calculations, some robo-advisors also keep an eye on any portfolio moves that can be made to help with tax-efficient asset placement and tax-loss harvesting. Plus, they can help you avoid making any bonehead moves that might trigger an unnecessary tax bill. That helps you achieve more robust returns over the long term while keeping more of your money out of Uncle Sam’s hands.
6. Robo-Advisor are Affordable
Robo-investing gives you access to high-quality, professional investment advice and planning at a fraction of the cost you’d pay elsewhere. What you don’t get is face-to-face interaction with your guru. That’s one way robo-investing firms keep costs low. That said, good luck even getting a living, breathing human advisor to answer your phone call if you have less than $500,000 to invest. Even if you do, you’ll pay a pretty penny for human service.
What to Consider Before You Hire a Robo-Advisor
On the surface, robo-investing services might seem like they all essentially do the same thing. But it’s important to look under the hood to compare fees, services and features. Keep these points in mind as you consider robo-investing:
- Fees: Look at fees that are charged to manage your account, and fees for specific investment recommendations — also called fund fees.
- Minimum investment requirement: How much — or little — money do you need to start using the service?
- Types of accounts: Does the advisory service offer the kinds of accounts that you need, such as an SEP IRA for the self-employed?
- Types of investments: Find out what kinds of investments can be managed in the account.
- A complete picture of your total portfolio: In terms of making allocation decisions, how much does the plan factor in investments you have elsewhere, such as in a current 401k?
- Custodial issues: Does the service operate using a brokerage or fund company that you already use, or are you required to move your money to their platform and have them act as a custodian of the account?
- Tax-saving features: Does the company help you perform tax-saving maneuvers like tax-loss harvesting and tax-efficient asset placement?
Ease, cost and convenience are key selling points of robo-investing. When you’re ready to get a helping hand setting goals and properly allocating your assets, make sure that your robotic money manager meets all of your real-world human financial needs
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment might lead to different results, and clients might lose money. Past performance is not indicative of future results. The tax loss harvesting strategy discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that its tax loss harvesting strategy will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing.
More on Investing