Are you a financial whiz kid? The answer is probably not, which means making financial decisions can often be very confusing. Understanding how the different options work, being aware of all the alternatives and deciding on the best type of investment can take a lot of time and effort. Being able to work out how much to invest and when also requires a certain amount of specialist knowledge. A course of action that many ordinary people take is to employ a financial advisor. Unfortunately, this type of service is often very expensive. There is some good news, however, for those wanting some help with their investment portfolio. An alternative is available that costs far less; it is known as a robo-advisor.
What is a Robo-Advisor?
Not so very long ago, anyone who wanted help with their investments would have to use the services of a financial advisor. A real-life financial or investment advisor would use his or her own knowledge, together with specialist software to manage clients assets and make investment recommendations. In return, they charge a fee which is generally 1% to 2% of the client's account balance. In 2008, it became possible for ordinary investors to buy the same technology the advisors were using and make their own investment decisions. A robo-advisor is a clever type of online software that selects investments automatically and builds a portfolio for the person using it.
How Do They Work?
A number of different tools are used to manage a clients portfolio, and these differ depending on the software being used. However, they do operate in a very similar way and offer the same end result. The robo-advisor uses mathematical rules or algorithms to provide financial advice. It is software, rather than a human, that allocates, manages and optimizes the user's assets, based on their preferences. There are currently more than 100 different services to choose from, which makes finding the best one a bit of a challenge.
The Benefits of a Robo-advisor
There are a number of different benefits, but the most obvious one is cost. The fees charged to use a particular robo-advisor are very reasonable. There is typically an annual fee of between 0.2% and 0.5% of your total account balance which can be paid monthly or annually. Expenses associated with the type of investment used may also have to be paid. You may find a number of robo-advisors offering promotions. For example, a Betterment portfolio can currently be enjoyed for up to one year free of charge. Other advantages include:
• Accessibility – a robo-advisor is on call to assist you with your investments 24 hours a day, provided you have an internet connection. Furthermore, anyone can use the service.
• Requires less capital to start – many have no account minimum, meaning anyone with any amount of capital can use it.
• Efficient – just a couple of clicks is all it takes, and some even have a handy app for your phone.
• Convenience – business can be conducted from the comfort of your own home. No need for meetings or expensive phone calls.
• Less stress – once you have opened an account, everything can be managed automatically by the robo-advisor.
For anyone who is new to investments, a robo-advisor can be a fantastic solution. They are also superb for investors who have little time to keep on top of their portfolio. We have become a society that uses technology to our advantage. Why should financial planning and investments be any different?