Automate or Not? Weighing the Pros and Cons of Robo-Advisors

Robo-advisors are digital investment platforms offered by brokerages. This includes investment managers and software that use computer algorithms to administer your investment portfolios. The best robo-advisors may be entirely automated, while others offer access to human assistance. Regardless of the model, they provide customer service to assist you through the process.

Consider both the advantages and disadvantages of this increasingly popular investment management solution.

Pros and Cons of Robo-Investing

Pros Explained

Robo-advisors come with many benefits. With robo-advisors, proprietary algorithms take the emotion out of investing and help you achieve better returns for a lower cost than traditional financial advisors. Retail investors who don’t have a lot of capital or have a rudimentary knowledge of the investment world may benefit from these services. They allow you to craft smaller portfolios with less hassle.

Lower Fees

Before robo-advisor platforms, you rarely received professionally managed investment assistance for less than 1% of assets under management (AUM). Automation has significantly changed that paradigm, and now you have many low-cost robo-advisor options.

For instance, there are no advisory fees or commissions with Charles Schwab’s Intelligent Portfolios, while the Wealthfront and Betterment models also cater to cost-conscious consumers.

Robust Investment Models

Many of the algorithms used by robo-advisors, such as Betterment, rely on Nobel Prize-winning investment theory to drive their models. Generally, best practices investment theory strives to create an investment portfolio with the greatest return for the smallest risk.

Some of the best robo-advisors use cutting-edge investment portfolio research informed by modern theories to drive their products.

Easy Account Opening

Traditional financial planners are increasingly using white label robo-advisor platforms for their clients. This minimizes the task of choosing assets so financial advisors can spend more time with their clients addressing individual tax, estate, and financial planning issues.

Some consumers, such as younger investors or those with a lower net worth, may not have considered seeking professional financial advice. However, robo-advisors are growing the market of financial advisory clients. Because robo-advisors provide easy access and lower fee models, more consumers may choose this type of professional management over the do-it-yourself investing model.

Lower Account Minimums

Investors with a small net worth can get professional financial management through a robo-advisory service. Robo-advisors like Betterment have small or no minimum balance requirements. Other robo-advisors require $1,000 to $5,000 to get started.

An advisor such as Rebalance360 has a higher barrier to entry, with a minimum entry fee of $1 million. That said, generally robo-advisors are more accessible than financial advisors.

And, if you’re interested in a specific sector or investment theme, some advisors have hundreds of portfolios to choose from that could fit your needs. But, if your primary concerns are rock-bottom fees, there are several robo-advisors with broadly diversified low-fee exchange-traded fund (ETF) portfolios.

Cons Explained

With robo-advisors, you don’t get the personalized service you would with a financial advisor guiding you through your investments. And despite the low cost, you may end up paying more in fees.

Limited Personalization

Robo-advisors can be configured or programmed to meet the needs of many investors by allowing you to set and edit your goals using their financial planning software. However, they don’t consider that you also may have money-related issues and concerns.

As such, you may benefit from talking to a human being who can help tailor your investment plan to your specific situation—something you won’t get using a robo-advisor.

Limited Flexibility

Most robo-advisors won’t be able to help you if you want to sell call options on an existing portfolio or buy individual stocks. There are sound investment strategies that go beyond an investing algorithm.

No Human Contact

If you want a relationship with your financial advisor, then a robo-advisors may not be right for you. Personal contact is more common with the traditional financial advisory models.

A human financial advisor can be assuage your fears and explain how the investment markets work. And a human financial planner can integrate your finances, taxes, and estate plans, whereas robo-advisors cannot take a holistic view of your specific financial situation.

May Be More Costly

Robo-advisors often charge fees, which vary based on your account balance. For example, Betterment charges a monthly fee of $4 for accounts with low balances. This fee automatically switches to 0.25% annually once the account grows to above $20,000 or if there are monthly recurring deposits of $250 or more.

History of Robo-Advisors

The first robo-advisors launched after the financial crisis that led to the Great Recession. The goal was to provide investors with low-cost alternatives to invest their money. Robo-advisors sought to use artificial intelligence (AI) and machine learning to create and manage investment portfolios instead of the human touch.

Betterment and Wealthfront are commonly credited as being trailblazers when it comes to being the first companies to offer algorithmic trading services to investors who demanded more transparency and control over their finances. Larger, more traditional firms like Charles Schwab began to offer these services as well.

The model proved to be popular among many investors, especially younger and tech-savvy individuals.

Evaluating Robo-Advisors

One critical issue when deciding whether to use a robo-advisor or to choose a platform is to consider how an advisor performs compared to its benchmarks. Is the robo-advisor’s portfolio outperforming the returns of the broader market or more passive investing strategies like holding index funds and ETFs?

The Bottom Line

The robo-advisory is lowering fees while allowing more investors to benefit from professional asset management. Determine what type of investment guidance you need and compare different services to select a robo-advisor or financial professional that’s best for you.