A robo advisor is a digital platform-based financial advisor who uses data algorithms and artificial intelligence to come up with an automated financial plan for investors with little or no human interaction.
A robo advisor will provide a list of basic finance and investment questions, based on your age and current assets, accumulated debt, investment-risk tolerance and long-term goals. When the questions are answered, the robo advisor will tailor a unique investment plan for the respondent, including the creation of an investment portfolio usually filled with low-cost exchange-traded funds (known as ETF's.)
The idea behind robo-advisory investing is to simplify the investment process using technology to build wealth-creating and risk-managed investment portfolios that are also tax efficient and that offer low fees. Previously, when investing, investors choices were pretty limited. They had only two options to choose from:
Historically, there’s been a problem with trying to get an FIA: Many have minimum asset requirements of $500,000 or more. These requirements put many FIAs out of reach for younger and lower-net-worth individuals. So if an investor fell into this category, he has to fend himself or get generalized advice from a financial advisor that may not be an informed advice. In addition, it’s not uncommon for FIAs to charge 1% to 2% annually (or even more via the loaded investment products they push you into). That’s 1% to 2% you have to do better than the market just to keep up. As history has shown, this is a steep fee to overcome, and in many cases, FIAs also came with substandard financial advice to boot. Let’s also not forget that — if the investment advisor isn’t a fiduciary — they may not offer investments in your best interest but recommend investment products that best line their wallets.
|Time & Research||High||Medium||Low|
Should You Use a Robo Advisor?
If you don't want to be directly involved with your finance and investment management, and don't require any human interaction when making financial decisions, a robo advisor could be for you. Or, your life could be so busy with a growing family, demanding job, or health considerations that hamper your ability to pay close attention to your personal finances. If that's the case, a robo advisor could also be for you. There are many benefits of using a robo advisor, such as: