What is a robot advisor and how does it work?
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It’s a typical situation: you know you need to invest money to really grow your wealth (and save for retirement), but you have no idea how investing actually works in the marketplace.
The world of stocks and bonds is certainly intimidating. Enter: robo-advisers.
If you don’t know much about investing, a robot advisor can be a good tool to help you get started. You’ve probably heard the term “robo-advisor” before. Betterment and Wealthfront, the pioneers of robo-advising, have been around since their creation in 2008 during the financial crisis. Automated investing was a new, easy and inexpensive way to invest that didn’t depend on a human to manage your portfolio.
Using algorithms and computer data, robot advisers are essentially software platforms that invest on your behalf. They charge a much lower advisory fee than a traditional financial advisor and setting up an account only takes a few minutes. From then on, you may never have to lift a finger again as robo-advisers automatically rebalance your portfolio from time to time based on your risk tolerance, market conditions and other factors. .
This is how robo-advisers work
The job of a robot advisor is to create an investment portfolio for you and then manage it along the way so you don’t have to.
Step 1: Open an account, answer questions, deposit money to invest
Once you have decided to open an account with a robo-advisor, you will start by creating a username. You will usually be asked to complete a short questionnaire. The questions will likely be about your age, your investment goals, your time horizon and your overall risk tolerance – that is, how much risk you are willing to take.
During the setup step, you will also connect your new investment account to a bank account to fund it. Although you do make an initial deposit to get started (different robot advisers have different minimum deposits) the idea is that you continue to contribute to your account so that you have more money which grows over time.
A robo-advisor with no minimum deposit, balance conditions
Those who choose active or automated investing through SoFi Invest® do not have a minimum account. You can also participate in IPOs with no minimum.
Step 2: The robo-advisor gets to work
Completing this series of questions helps the robot advisor determine where to allocate your money. Many robot advisers use a popular strategy called Modern Portfolio Theory, or MPT, which tracks funds like the S&P 500 and prioritizes diversification to minimize risk. Robo-advisers therefore rely on low-cost mutual funds or exchange-traded index funds (ETFs) that spread your investments across different assets.
Step 3: The robo-advisor can customize according to your investment objectives
Beyond mutual funds and ETFs, however, the robo-advisor ultimately uses your investment goals to help you decide your asset allocation.
Your investment portfolio for saving for a short-term future home will most likely be different from your portfolio for saving for long-term retirement. In fact, more and more robo-advisers are offering individual retirement accounts (IRAs) for retirement purposes.
A robo-advisor with options
Wealthfront offers a range of investment vehicles, including a taxable but also traditional brokerage account, Roth, SEP and / or a Rollover IRA. It is also distinguished by the fact that it allows investors to save very early for their children’s college years through a 529 account.
For those who wish to be a little more active during this process, you may be able to choose some thematic portfolios, such as a socially responsible portfolio. More experienced investors, with perhaps more liquidity, usually have other personalized investment options. For example, Wealthfront allows you to allocate a portion of your portfolio to industry-specific cryptocurrencies or ETFs like tech or healthcare.
Step 4: Robo-advisers will automatically monitor your portfolio
As market conditions change or you invest more money, the robo-advisor’s software will automatically adjust your portfolio to better align with achieving your goals. These periodic buying and selling are better known as “rebalancing”.
While robo-advisers are premised on the absence of human oversight, some offer access to real financial advisers if you want one in your investment journey.
A robo-advisor who gives you human access
Those who enjoy talking to a real financial advisor should consider a robo-advisor like Betterment. Its premium plan allows users to get unlimited access to a financial advisor. Otherwise, the one-time advisor consultation fee ranges from $ 199 to $ 299.
At the end of the line
If you’re ready to put your investments on autopilot, a robo-advisor might be the right choice for you. You don’t need a lot of money, time, or knowledge to get started. While we mention some of the major ones in this article, be aware that many online brokerage firms have their own robo-advisor component which allows investors to invest automatically.
And you can trust most robot advisers. Much like a human financial advisor, legitimate robo-advisers are registered with the United States Securities and Exchange Commission (SEC) and therefore follow the same laws and regulations as a traditional human broker. Most robo-advisers are also members of the Financial Industry Regulatory Authority (FINRA). You can check the registration and license of a robo-advisor through the free BrokerCheck tool.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.