By: Paul A. Werlin, President, Human Capital Resources, Inc.
Over the years, talking and meeting thousands of people, I’ve found that the number one reason people don’t invest is FEAR. Fear of loosing money, fear of making the wrong investment, fear of taking the first step, fear of being rejected because they only have a little money to invest, or fear of having to actually talk to someone and looking dumb. Well, there is now a way to eliminate many of these fears — use a robo-advisor.
Robo-advisors are internet-based firms that provide automated, formula-driven financial and investment planning services with little to no human involvement. A robo-advisor will get your information online — information you provide about your financial status, income, risk tolerance, goals, etc., and will use this information to give you advice and set-up automatic plans to help you achieve your goals.
So how can using a robo-advisor help to reduce or eliminate many of the fears that hinder people from starting on the path to investing? Well, there are a few ways. First, there’s almost no contact with a live person when using a robo. Sure, you can get live help, but for the most part, everything is online and automated, so there’s no potentially embarrassing conversations with an actual financial advisor.
Second, many robo have extremely low minimum investment requirements. In fact, one of the more well know firms, Betterment has no minimum investment required, and most of the other have low minimum compared to traditional brokerage firms. Another advantage of a robo-advisor is they tend to charge much lower fees than traditional firms, as little as .02% to .05% compared to 1%-2%. While it might not be an advantage for some people, robo-advisors since their platforms are online, are open 24-7, making it easier to work on your investments when it’s most convenient for you.
While there are clearly advantages to using a robo, there are disadvantages as well. With a robo, your investment choices are more limited. You can’t invest in individual stocks or pick the specific mutual funds or ETFs you want. But most robos do utilize modern portfolio theory (or some variant) in order to build passive, indexed portfolios for their clients. Once established, robo-advisors continue to monitor these portfolios to ensure that the optimal asset class weightings are maintained even after markets move. Robo-advisors achieve this by using automated rebalancing to keep your account in line with your goals and objectives.
Since their inception in 2008, robo-advisor popularity has exploded, with combined customer assets today of about $1 trillion of. For people looking to take the first step, a robo-advisor is certainly worth looking into, check out a list of some top rated-robo-advisors for more information.