What is a Robo-Advisor?
February 11, 2021 (Investorideas.com Newswire) If you are a novice investor, you may be struggling to understand all the new words and acronyms that are being fired at you. ETF, IRA, Roth, RMDs, 401(k), 403(b), UTMA, NBC, 529, when will the acronyms and numbers end? And wait, isn't one of those a broadcast network? Granted, all the acronyms and number designations take a long time to learn, especially after you throw in cooler-sounding words like "robo-advisor".
A robo-advisor is an automated investing platform that allows users to buy and trade stocks, ETFs (electronically traded funds), and other investments. It also gives investors advice and has very minimal human interaction.
Sounds easy right? Well, it does not just sound easy, it is easy. You can open an account with a robo-advisor and begin investing in the stock market within hours (pending a connection to your bank). There are many robo-advisors available on the market. Check out this robo-advisor comparison if you are looking for the best available options and read on to learn everything you need to know about robo-advisors.
What do Robo-Advisor's do?
Robo-advisors use algorithms and mathematical rules to provide financial advice to its users. Since the algorithms are built into the robo-advisors software, no human advisor is required. Robo-advisors can automatically invest and manage a client's assets and some can even perform re-balancing and tax loss harvesting functions.
The advent of robo-advisors have made investing more easy for many people, because they no longer have to physically visit a broker. They also save investors time, with many robo-advisors having a "set-it-and-forget-it" type of operation. However, there are some robo-advisors that could get you into all the minute details of investing as well.
There are over 100 robo-advisor services currently on the market, all provide a similar service- easy investing through a mobile app or computer. Robo-advisors are one of the best ways to invest money.
Account Types with Robo-Advisors
Besides a standard brokerage account to buy and sell stocks, ETFs (electronically traded funds), and index funds, many robo-advisors additional account types. Some robo-advisors have so many account types that you could potentially hold all your assets with them! Here is the full list of account types robo-advisors offer:
- Brokerage account
- Checking account
- Savings account
- IRA (Roth, Traditional, SEP)
- UTMA/UGMA accounts for your children
Automatic Portfolio Rebalancing
One of the benefits of a real-life human financial advisor is that they can rebalance your portfolio for you. For example, if you want to keep a 80/20 stock/bond allocation, a financial advisor would routinely rebalance for you. Now robo-advisors have this capability too, further emphasizing their usefulness.
How do Robo-Advisors Make Money?
Robo-advisors make money through the fees that they charge on your accounts. This is typically a management fee - a fixed percentage, a monthly fee - a flat cost per month, or it could be a mixture of the two.
Typically robo-advisor fees are a very small percentage like 0.25% for the management fee and $1 to $5 for a monthly rate. All robo-advisors charge 0 transaction fees, which is great for those who like to buy and sell often. With their minimal fees, robo-advisors are great ways to save extra money.
What are the Best Robo-Advisors?
There are many great robo-advisors on the market, there are a lot of similarities between them however a few have unique and advantageous features. Here is a short overview of the top 3 robo-advisors.
Betterment was one of the first robo-advisors on the market and could very well be the best one on the market today. With Betterment, you can invest your assets into 13 different portfolio types, from a high bond & low stock to a high stock and low bond allocation. You cannot invest in specific stocks, only diversified allocations.
With Betterment, you can open and manage the following account types:
- Brokerage Account
- IRA/Roth IRA/ Sep IRA
Betterment has several unique features, but its standout one is its automatic tax-loss harvesting system. Betterment also does automatic account rebalancing and has an easy to use interface.
The cost to use Betterment is not much, there is a 0.25% fee for a standard account (0.4% for the premium account) and no account minimum. Check out this Betterment review for the full details.
M1 Finance launched to the public in 2015, it is a privately held securities exchange and is SEC registered. With M1 Finance, you can also open multiple accounts- a brokerage, a checking account, and a loan account.
In M1 Finance's brokerage account you are able to invest in individual stocks and even create what is called an "investment pie". The investment pie allows you to add multiple single stocks, once the stocks are added you can assign a weight to each. When your pie is ready you can just contribute to your pie and purchase fractional shares of the stocks within the pie at the percentages you assigned.
M1 Finance's platform is easy to use and is accessible through a well-designed mobile application.
Acorns is arguably the most unique robo-advisor out of everything. Their core investment principle is investing spare change into diversified brokerage accounts through round-ups. If you like saving pennies periodically, Acorns is right for you.
Round-ups occur on any transaction you have with a linked credit/debit card. If you spend $26.76 at the grocery store, your transaction will be rounded up to the nearest dollar and $0.24 cents will be transferred to your acorns account.
You can add automatic contributions as well, and pick from 5 different investments/allocation from a conservative portfolio (more bond weight) to an aggressive portfolio (heavily stock weighted). You cannot invest in specific ETFs or index funds like VTI or VTSAX, you can only invest within their set portfolios. Besides their brokerage account, called Acorns Invest, they have these additional accounts available:
- Acorns Early -- a UTMA/UGMA account for kids for when they are older.
- Acords Spend -- a checking account with a fancy metal debit card.
- Acorns Later -- an IRA account with Roth and traditional options.
Acorns also has an intuitive app, with a spectacular feature called "Your Potential". In Your Potential, you can see what your investment could grow to by the time you retire, you can also see the effect your future balance would have if you start routine investments or increase them.
Without robo-advisors, investing in the stock would be much more difficult. You would either have to call a broker or visit them in person to purchase a stock, ETF, or index fund. It is clear that robo-advisors make investing easier and more accessible to everyone. If you have not yet, you should try out a robo-advisor today.
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