Robo Advisors: Should You Automate Your Retirement Savings and Investments?
Robots. They answer the phones at our insurance agencies. They build cars in our factories. They even vacuum our floors if we own a roomba.
They now can now also make personalized investment decisions for you and your retirement.
Robo Advisors are a relatively new type of online investment service that are designed to help us make the best investment decisions possible.
What is a Robo Advisor?
Not all RoboAdvisors are alike. Their services vary somewhat, but most will touch on these five aspects of retirement investing.
1. Help You Determine Your Asset Allocation Strategy: RoboAdvisors start by helping to develop an asset allocation strategy — deciding how your assets are invested — what percentages of your savings are deployed in different types of investments. Putting all your eggs in one basket might be a poorly conceived asset allocation strategy. Having a mix of bonds, Exchange Traded Funds (ETFs), mutual funds and stocks might be a better asset allocation strategy.
Asset allocation strategies are defined by your:
- Goals: What are your goals for your money. Do you need a certain level of retirement income, for example.
- Risk tolerance: Can you shoulder risk? Or can you not afford to lose any of your principle.
- Time frame: How soon do you need to hit your goals. How soon will you be retiring, for example.
2. Select Investments: Secondly the Robo Advisors select the individual investments. It is not enough to know that your asset allocation should invest 25 percent of your money in stocks, you need to know which stocks. And usually the right answer is a balanced and diverse portfolio of different stocks — the Robo Advisor can tell you exactly this.
3. Make the Investments: Perhaps the most boring task a Robo Advisor performs is actually making the investments. But getting it done is also the most important aspect of investing.
4. Rebalancing: Robo Advisors also help you to rebalance your portfolios. Rebalancing is the act of buying and selling your investments in order to maintain your asset allocation strategy. This is a task that often goes undone by investors going it alone.
5. Consider Tax Efficiency: Tax efficiency can be an important aspect of making investments and rebalancing.
What Are the Pros and Cons of Using a Robo Advisor
There are quite a few advantages:
- Robo Advisors can offer high quality and personalized investment advice at a lower cost than working with a financial advisor — though more expensive than doing it yourself.
- Anyone can use a Robo Advisor, whereas only people with sufficient assets can access some investment advisors.
- The automated nature of investing with a Robo Advisor is convenient and can actually improve your investment returns, taking emotions out of the decision making.
- Both sophisticated and novice investors can learn from Robo Advisors.
There are also some disadvantages to using a Robo Advisor:
- Not all accounts can be managed by all Robo Advisors, so the asset allocation might not take into account that your 401k with your current company is 100% in stocks. However, there may be work arounds.
- Tax efficiency is not always the primary concern of Robo Advisors.
- If you need to talk with someone in person or by phone to feel comfortable with your investments, Robo Advisors might not be a good option.
- Goal setting is more simplistic for Robo Advisors — great for saving for retirement, but not as good if you have multiple goals each with different time horizons.
- You need to know your retirement goals.
Who is the Best Robo Advisor?
Here are a handful of the Best Robo Advisors. If you are interested in investment advice, you might browse each one and get a feel for which best suits your preferences.
The New York Times offers a side by side review of most of these and some other less popular Robo Advisors in the article, “Financial Advice for People Who Aren’t Rich.”
We have provided the company’s own descriptions of themselves to help you size up their personality — just remember that this is their own marketing.
Wealthfront: Clients trust Wealthfront to manage over $2.6 billion of their assets.
Future Advisors: “You already have investment accounts, we help make them smarter.”
AssetBuilder: “Diversification. To us, it’s the only investment strategy that makes sense.”
Personal Capital: “The modern way to manage your net worth.”
Betterment: “Investing made better”
MarketRiders: “Do it yourself investing software, made simple.”
Is a Robo Advisor for You? Do You Know Your Retirement Goals?
There are real advantages to using a Robo Advisor for retirement planning — no matter your wealth profile.
However, one of the biggest challenges you might face is determining your goals. You need to be able to answer the important retirement planning questions:
- How much do I need for retirement?
- When can I retire?
To help with these questions, you might want to use a different kind of Robo Advisor — a retirement calculator. The NewRetirement Retirement Calculator is one of the best and gives you lots of options for discovering your goals.
Are you ready for the robots to take over your investing? What do you think the best ideas for retirement investments are?