Are Robo-Advisors Worth It?
There are quite a few factors to consider before you start investing money. One of those is whether you should be using a robo advisor. These solutions have emerged not so long ago, but they became popular fast. This year, as fintech has skyrocketed in popularity, more people are wondering whether using robo advisors is worth it. The answer is complicated because it depends on how hands-on you want to be with investing.
It’s important to understand that neither using robo advisors nor discount brokerage platforms is perfect. There are always risks to any investment, even if you choose the seemingly “safe” real estate.
If you are a complete beginner with no knowledge of trading, your risks are much higher. Neither of these solutions can make up for the lack of experience and options. To buy and hold an index is not a strategy at all because it can’t be really profitable. Therefore, unless you hire an experienced personal broker, you are exposed to a great level of risk.
So, the question is whether you should risk using a discount broker or a robo advisor?
What Are Robo Advisors and How Do They Work?
Robo advisors are hands-off investment platforms that are driven by algorithms. Simply put, they collect the data you provide, which includes your goals and finances, and invest your money in a way that is most beneficial for those goals. The process is largely automated and powered by complex algorithms.
The most important thing to understand about using robo advisors is that they offer hands-off investing. This means that you don’t really make any complicated investment decisions. You will be able to choose your general strategy, but the software will make all other relevant choices. Therefore, your investing plan will be as close as possible to complete automation.
The quality of a robo advisor platform is largely determined by how robust the goal-planning options it offers are. One of the main cons of using these solutions is that you don’t get much investing flexibility. More options for goal planning make up for this to some degree.
Robo advisors should also offer good customer service and a wealth of informational resources. They must educate users about investing strategies, risks, etc. Therefore, when using a robo advisor you get a chance to make money and increase your knowledge.
Other factors to consider when dealing with robo advisors are fees and minimum account balance requirements. As these platforms are designed to make investment easy, the majority of them do not require a big minimum balance (if at all). However, fees vary greatly and will usually be higher compared to using online discount brokers.
Investors used to be a bit wary of robo advisors. But their popularity has grown fast during the COVID-19 pandemic. 40% of investors using them say the most important reason for their choice was accessibility. And it’s true that robo advisors make investing accessible to everyone. You can use them even with no knowledge and a very small budget.
Robo Advisors Vs. Discount Brokers
Many people wonder whether it’s better to use a robo advisor or an online broker, which is a bit cheaper overall. These services are similar in that they make investing more accessible, but they differ in the level of involvement.
However, it must be noted that these lines blur somewhat today. For example, according to a comparison of Questrade (broker) vs Wealthsimple (robo) both these successful solutions released additional solutions that mimic the other type of platform. Questrade now has Portfolios, which are a limited version of a robo advisor service. In the meantime, Wealth simple Trade is basically a full-fledged online discount broker.
Of course, only the biggest and most successful platforms are doing this. But it means that soon there might not be much of a difference between a robo advisor and an online brokerage. You will simply choose one you’d like to start with and will be able to switch to another type as easily as changing a subscription package.
However, at the moment, when the differences between these solutions still matter, you need to know that robo advisors cost more because they do more work. Online brokers facilitate your access and management of investments. However, they are very much hands-on. This means that you do all the choosing of where and how much to invest. You also need to physically complete most of the steps.
Robo advisors do all this automatically but at the cost of your choices between specific funds to invest in. The fee is higher, but the possibility of making a mistake and losing is lower. Therefore, if you are a complete beginner, this is the safer option.
Also, note that online brokers offer almost no customer support. Therefore, you are completely on your own when making investment decisions. This won’t be an issue if you know what to choose. But otherwise, you might be too lost and confused.
Should You Put Your Trust in Robo Advisors?
If you are trying to decide between using a robo advisor, a discount online broker, or DIY investing, it all boils down to how much work you want to do. First of all, remember that the buy & hold strategy won’t make you much money fast. In fact, it will expose you to a lot of risk. So, if you want to do it yourself, you need to become an active trader who is fully invested in market research. This is a lot of work and you need both knowledge and experience to succeed. If this is the route for you, a discount brokerage platform could be a good choice. It will allow you a lot of flexibility but provide little to no outside help.
However, if you are looking to automate your investing as much as possible, robo advisors are for you. They are very user-friendly and suited for beginners. They aren’t as flexible, but they will offer you help and general guidance. You can use these solutions to learn more about investing. When you are more experienced, you can choose whether to stick with a robo advisor or start investing on your own.