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June 29, 2020
Robo-advisors might sound futuristic, but they’re really not as new as they sound.
Robo-advisors use the same technology that’s been available to human advisors for decades, according to Investor Junkie, but it’s just now coming available to the everyday investor.
Question is, can a robo-advisor help you manage your investments, or is this something that’s better managed by someone else?
One of the biggest draws of robo-advisors is the low fees, which are typically a lot lower than those charged by a human advisor. Another reason some people love them is that they put the investor in total control with access to a wider distribution channel.
If this is all news to you, consider these questions to help decide whether automation is the way to go, or if you need the human touch with your financial planning.
Are you just getting started with savings, or is your wealth relatively modest? Most human financial advisors and some robo-advisors have a minimum deposit, according to Investopedia.
However, the minimum deposit for most human advisors is $300,000 to $500,000. The minimums for robo-advisors vary widely but are generally much less than financial advisors require. For example, Betterment does not have a minimum deposit, Wealthfront requires $500, and Future Advisor requires $10,000.
Do you have a fairly impressive portfolio with a lot of wealth management needs? Or are you focused on just one goal?
A robo-advisor typically works better for people with simpler financial management demands.
Although a robo-advisor can professionally manage a simpler portfolio, it can’t offer some of the big perks that a person can. If you need portfolio management that manages multiple different goals such as retirement planning, saving for college, estate planning, etc., you might need a traditional advisor.
However, robo-advisors are getting increasingly sophisticated.
Most robo-advisors are best used by people with some investment knowledge.
They’re especially suited to those who have a high level of comfort with DIY investing.
However, newbies can probably find their way through and you won’t be worse off than if you were making decisions entirely on your own.
And, on the other side of the spectrum, if you yourself have a high level of investment knowledge, these tools might not offer you any advantages.
The human touch can be important for helping investors make sound decisions.
Where an algorithm can’t explain why you should stay the course with an investment instead of selling at the wrong time, a person can.
Some people need the hand holding and prodding that only a human can provide.
A few robo-advisors offer a fair amount of human interaction, generally by phone. These services are slightly more expensive than the purely automated robo-advisors.
Shop around to find the robo-advisor with the right level of human support for your needs.
To use a robo-advisor, you should probably be a sophisticated user of technology and be good at managing your own finances.
If you are late paying bills, then you might need more support than a robo-advisor provides.
One of the biggest reasons to opt for a human advisor is if you do not yet have investment goals. Most robo-advisors do not help you set financial goals, only achieve them.
Before using a robo-advisor, you might want to first use a retirement calculator to help you understand how much money you need for retirement.
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