Pros and Cons of Using a Robo-Advisor

The types of Robo-advisors available vary per brokerage.

The umbrella phrase refers to a group of investment managers and software that administers your investment portfolios using complex computer algorithms. Some Robo-advisors are entirely automated, while others also provide human support. Regardless of the model, customer assistance is available to help you through the procedure. The overarching promise of Robo-advisors is that their proprietary algorithms claim to remove emotion from investing and provide greater returns at a cheaper cost than traditional (i.e., human) financial advisors. Each advisor, on the other hand, cannot have the "best" proprietary algorithm.

Let's take a closer look at the benefits and drawbacks of this new and rapidly increasing style of investment management.

Pros of Robo-Advisortrad

Low Fees

Investors were fortunate to receive professionally managed to invest help for less than 1% of assets under management before the arrival of Robo-advisor platforms (AUM). The robos have fundamentally altered this paradigm. There are various low-cost Robo-advisors to choose from, ranging from zero percent for Charles Schwab Corp.'s Intelligent Portfolios to 0.25 percent for a Betterment portfolio. The Wealthfront and Betterment models cater to the frugal shopper.

Expanding the Market for Financial Advice

Some customers, particularly those who are younger investors or have a lesser net worth, may not have considered expert financial guidance. The present market of financial advisory clients is being expanded by Robo-advisors. More consumers may select Robo-advisors' professional financial management over the do-it-yourself approach due to ease of access and lower pricing structures for professional financial management.

Cons of Robo-advisor

No Face-to-Face Meetings

Most Robo-advisors aren't for you if you desire personal interaction with your financial advisor. The robos don't have a physical location where a client can come in and speak with an advisor. Traditional financial advisory models are the only ones that provide this level of human touch.

Robo-Advisor Performance

Investors must consider performance vs. benchmarks when selecting whether to use a Robo-advisor and, if so, which one to use. BackEnd Benchmarking, a key source of Robo-analytics, examined 20 such products before naming the best Robo-advisor for 2021. Through June 30, 2021, their three-year annualized returns, net of fees (i.e., after expenses), varied from 7.44 percent to 12.10 percent. The difference between their three-year normalized returns and their benchmarks ranged from 3.98 percent to 0.38 percent. Only four of the study's twenty Robo-advisors outperformed their benchmarks.

They Aren’t 100% Personalized

You're more than just a collection of investments. You have a lot of short-term and long-term objectives. While many Robo-advisors now allow you to define and revise your goals using their financial planning software, you may also have money-related questions or concerns that would benefit from a talk with a human. After a severe market decline, most Robo-advisors will not take your hand and talk you down from the ledge. The human financial advisor is on hand to calm your nerves and explain how the stock market works. Your finances, taxes, and estate plans are all integrated by a financial planner. The advisor's office may have a varied pool of other advisors who can assist with a variety of issues other than money.

Conclusion

The sphere of Robo-advisory is only getting begun. The newcomers assist the consumer by cutting rates and providing a variety of options for professional asset management. As with any other life decision, the investor should determine what type of investment advice they require and then choose a Robo-advisor or financial professional that best fits their needs.