This article was republished with permission from Modest Money.
Technology has come a long way in the last twenty years, especially with one advancement in particular: Robo-advisors. What exactly are they?
So what exactly is a Robo-advisor?
In the simplest terms possible, a Robo-advisor makes all your investments for you. Robo-advisors will automatically detect your risk tolerance and investment philosophies(usually through a quick survey or questionnaire) and create an investment portfolio that works for you. Once your money is in the account, the Robo-advisor will continually monitor your investments and returns and modify your portfolio as it sees fit so it sticks to your goals.
In my opinion, Wealthsimple is hands down the best Robo-advisor you can find today. For the Canadian audience, they are already well established in the Robo-advisor industry. For the Americans, you’re in luck. Wealthsimple has just begun to enter the American market and I am certain will soon take the market by storm. If you’re looking for an in-depth review, check out this amazing Wealthsimple Review.
So how will I benefit from using a Robo-advisor?
If you are a passive investor, don’t have time to make your own investment decisions or simply don’t know what you are doing, a Robo-advisor can be one of the best avenues to head down if you are looking to start saving and investing your money.
A Robo-advisor is simply that, a robot. Robots don’t have brains, they don’t sense stress and they do not make reactionary decisions based on emotion. It can be argued that a lot of new investors lose money simply because they don’t have the skills required to pick profitable stocks either. A Robo-advisor automates this process for you.
Investors who want to get started immediately may benefit from using a Robo-advisor to grow their funds while they learn the intricacies of the stock market. Once the investor feels they have a solid grasp on what it takes to make market returns, they can transfer the funds from their Robo-advisor into a self-directed account. Or, if they are making solid returns on their Robo account, can simply open a self-directed account and fund it with other capital.
What will I be investing in with a Robo-advisor, and what are the fees?
Most Robo-advisors focus on ETFs, which is why their fees are typically lower than mutual funds you may own. However, some Robo-advisors can also have holdings in mutual funds as well. Investments are easily monitored inside of a Robo-advisor account and you can typically see where your money is allocated in a few clicks.
Robo-advisors typically have two forms of payment. You can either pay a monthly fee, or you can pay a percentage of your total portfolio. The monthly fees will vary wildly from broker to broker depending on your account size, so please check them out before signing up. In terms of percentage, typically Robo-advisors charge anywhere from .2 to 1 percent of your portfolio amount. This is considerably lower than most mutual funds. This is typically due to the fact that Robo-advisors are easier to manage, and have a lower MER.
So, should you use a Robo-advisor?
The answer to this isn’t necessarily cut and dry. Some DIY investors have self-directed accounts along with Robo-advisor accounts. Saying you have to be 100% on either side of the scale isn’t correct. Even if you exclusively make your own investment decisions on your retirement and investment accounts, you may feel obligated to try one out. Maybe it provides better returns than you are achieving right now?
There is nothing wrong with getting some help when it comes to investing your money, and a Robo-advisor can take some of the stress off your back. Maybe you are too busy to manage multiple accounts and instead want to have someone manage one of them. Instead of paying a big bank or a financial advisor exorbitant fees to manage your money, why not give a low-fee Robo-advisor a chance?
This article was republished with permission from Modest Money.