Investing and financial planning has changed dramatically over the past few decades. Advances in technology and user-friendly brokerages have made investing open to everyone, and costs have simultaneously plummeted, opening doors even further.
The problem some investors now face is not accessibility but rather an overabundance of choices. In addition to traditional financial advisors, investors can now choose to hire so-called “robo-advisors” and even manage their own portfolios. But what are the pros and cons of each type of investment style, and which one is right for you? Read on to learn how to make the best choice.
A robo-advisor is an automated platform that uses an algorithm to make investment choices. The algorithm uses input provided by a user regarding such variables as investment objectives, risk tolerance and investment time horizon. With little human interaction, robo-investing is both simple and affordable, with fees that can run around 0.25% of assets per year or even less.
The main benefit of robo-investing, in addition to its low cost, is that the process is so simple. Half the battle of being a successful investor is getting and staying in the game, so the automated deposit and investment capabilities of a robo-advisor can be particularly helpful for newer investors who know they need to invest but want to take a hands-off approach to the whole process.
If you find a good, certified, fiduciary financial advisor, you can be certain that you are dealing with an expert in their field. In addition to providing you investment advice, a good financial advisor can help you with a myriad of personal finance needs, from estate planning and life insurance to tax avoidance and college savings. Of course, in exchange for this multitude of services, financial advisors charge fees. Some charge 1% or more of your assets as an annual fee, while others might charge additional commissions for investment products and/or flat fees for various services.
If you’re in need of more than a broker to handle your stock trades, a financial advisor can be a good investment. However, if you’re not yet in need of the additional services that help make a financial advisor worthwhile, you might want to hold off on hiring one.
Self-directed investing is more accessible than ever. Financial information has never been easier to come by, thanks to the internet and the financial press, and a wide range of brokers, even big names like Merrill Lynch and Chase offer $0 commissions on most stock and ETF trades. If you’re willing to put in the time to do your own research and have the financial discipline not to blow yourself up with over-trading, a self-directed investing account might be a good fit for you.
The main caveat with self-directed investing is that $0 commissions often encourage excessive trading. Some investors feel that they can jump in and out of positions as rapidly as they wish simply because there is no commission cost, but the reality is that succeeding as a day trader is difficult at best. If you’re willing to invest for the long term and have the financial ability and discipline to construct a winning portfolio, a self-directed investment account could be the cheapest and most efficient option for you. But if you don’t have a solid grasp of how the financial markets work or the discipline to keep your trading under control, you’re likely better off with either a robo-advisor or a financial advisor.
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