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Is Robo-Advising the Right Fit for You?

The future is here, and it can be part of your investment strategy.

01/30/2023
Close-up of a hand using a smart phone.

Robo-advising is a newer tool that can offer investors a tailored strategy and lower fees than working with a financial advisor. The hands-off, low-fee investing sounds enticing to many, but are robo-advisors worth it?

What Are Robo-Advisors?

First launched in 2008, robo-advisors use technology, data and algorithms to drive portfolio planning strategy. Before robo-investing, investors had to do their portfolio planning themselves or use a financial advisor to ensure they were staying on track.

Because they rely on software, robo-advisors feature low-maintenance costs and a nearly human-free alternative to traditional investing. That means “advising” looks more like an automated adjustment than a sit-down meeting or call from an advisor. Depending on the investment company, the strategy and adjustments may be completely or partially automated.

To get started with a robo-advisor, you simply fill out a questionnaire to gauge your financial goals, risk level and preferences. Then the software provides an investment strategy. From there, you can deposit funds and let the technology do the work.

Benefits of Robo-Advisors

For the right investor, there are plenty of benefits to using a robo-advisor:

  • Lower fees and minimums. Compared to a traditional advisor, most robo-investment platforms have lower fees and lower barriers to entry, meaning you don’t need to invest much to get started.

  • Extra features. Some robo-advisors can offer tools like automatic tax-loss harvesting and portfolio rebalancing, making it more straightforward for hands-off investing.

  • Investing that’s always on. Since robo-investing requires limited personal interaction, investors can access digital tools 24/7.

Drawbacks of Robo-Advisors

Robo-investing has many pros, but it also comes with a fair share of cons, including:

  • Impersonal planning. While getting started with a robo-advisor takes only a simple questionnaire or a few clicks, it also means a lack of human interaction. You’re less likely to get a personal touch or develop a relationship with an advisor. However, depending on the investment company, there may be an opportunity for ad hoc discussions with a person as part of the package.

  • Limited products. Robo-advisors typically work with a limited selection of exchange-traded funds (ETFs) and index funds, making it a challenge to purchase certain individual stocks or assets.

  • Inflexible account types. Most robo-advisors can manage some individual retirement accounts, as well as taxable investment accounts. However, few offer 401(k) management or trusts.

Looking for Other Ways to Make Investing Easier?

Whether you a use robo-advisor or work with a financial consultant, an automatic investment plan can help keep you on track toward your goals.

Are Robo-Advisors Worth It?

Working with a robo-advisor is worth it for some, but perhaps not everyone.

If you’re new to investing, the affordability and low barrier to entry of robo-investing could be a good fit. Plus, you don’t have to manually rebalance or constantly check your investments.

But if you prefer a do-it-yourself approach to investing, or prioritize having a human connection, robo-advising might not be worth it. If you’re more hands-on with your portfolio, the automatic features of robo-advising might be a hindrance more than a help.

Additionally, if you want to hold all your investments in one place, it may be hard to do that with a robo-investor. The one-size-fits-all solution is a great fit for many, but it doesn’t offer much customization. If you’re happy with your current investment plan, don’t feel pressured to change it just because of a new trend.

For those who prefer hands-off investing or are just dipping their toes into creating a portfolio, the simplicity and low cost of robo-advising may be a great starting point.

Is Robo-Advising Right for You?

Reach out to our team to learn more.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.