What is a Robo Advisor and How are They Part of your Investment Strategy

What Is A Robo Advisor And How Are They Part Of Your Investment Strategy? [2021]

What Is A Robo Advisor And How Are They Part Of Your Investment Strategy? [2021]

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Do you want an automated investment strategy where you can sit back and just have your money working hard for you? That’s the idea behind using Robo Advisors to handle your investments. 

What is a Robo Advisor?

Robo Advisors are not some futuristic robot that is out there to take over our financial future, they’re not robots at all, but very intelligent software programs built by very smart people to help automate your investing and portfolio strategy at ultra-low costs.

There are currently over 250 Robo Advisors in the market today and it’s growing at a rapid pace.

Why should you use a Robo Advisor?

So why would anyone want to use a Robo Advisor over a traditional financial advisor or professionally managed portfolio? In other words, why would anyone trust their hard-earned money to some piece of software to make critical investment decisions for them that could potentially put your entire nest egg on the line? The two main reasons are that they are very convenient and have typically some of the lowest management fees in the industry.

Advantages of a Robo Advisor

Let’s start with the convenience part. Because you don’t have to deal with any personal consultations with a financial advisor at a brokerage firm, and all you’re doing is interacting with a software program, you can typically access the Robo Advisor twenty-four hours a day, three hundred sixty-five days a year for your investment portfolio needs. You can’t beat those hours. Especially because people are typically busy with their work and home life and don’t want to plan around when they might be able to consult with a  traditional financial advisor. 

Generating your Robo Advisor investment portfolio

When you work with the Robo Advisor, you’re typically entering specific information into the software algorithm for it to be able to generate your investment portfolio. Some input examples include your time horizon, how much you can reinvest, how frequently you can reinvest, risk tolerance (high, medium and low), and other typical goals. The Robo Advisor software then automatically generates for you a portfolio based on all of these inputs. The Robo Advisor will also make necessary adjustments over time-based any input changes from you and or given market conditions. For example, if you ask for a lower risk-tolerant portfolio and you’re currently on a high-risk track, the Robo Advisor might learn towards more treasury or bond type of investments as opposed to a higher risk portfolio comprised mostly of growth or other types of stock investments for example.

Robo Advisor investment options within the generated portfolios

The typical options in these portfolios are low-cost exchange-traded funds or ETFs, bond funds and other low-cost managed funds. These security offerings keep the operational costs low all while providing maximum given market return potential. Don’t take this as given, always check the allocations set forth by your Robo Advisor, understand where your money is going, do your own research and make sure you’re comfortable with the investments it has generated.

Recent Robo Advisor trends, especially with millennials

The recent trend is that more and more millennials and younger generation investors are leaning towards this software Robo Advisor algorithms for their investment planning, purely out of convenience, cost and lack of trust with traditional financial professionals. They witnessed what their family members endured through the previous financial crisis and watched them take on significant financial losses with traditionally managed portfolios. Because of this and their embrace of technology, this younger generation of investors has more trust and faith in software Robo Advisors, amplifying their industry growth and financial inflows.

For more information in regards to What do Online Shoppers and Investors Who Use Robo-Advisers Have in Common?, click the link to the SEC’s website.

How to choose a Robo Advisor

So how do you go about finding a Robo Advisor? First off, they typically have a low barrier to entry from an investment amount standpoint, some require no money to open an account, some as little as $100 and some up to $100,000

My top choice for Robo advisors are below.

If you looking for a no-fee solution where you can start investing for as little as $100 check out M1 Finance below. 

#1 Rated Robo Advisor & Dynamic Portfolio Rebalancing

#1 Rated Robo Advisor & Dynamic Portfolio Rebalancing

The M1 Finance investment, retirement account and technology are simply amazing. They even offer dynamic re-balancing, full customization and even some pre-built portfolio options called expert pies. M1 Finance is a strong recommendation for your automated investment and retirement needs. Try them today with only as little as $100 to start investing.

M1 Finance custom pies

If you’re looking for an automated way for IRA retirement investing with a small monthly fee then my top choice is Acorns. If you like the option of still working with a person and having the benefits of a Robo Advisor, then a hybrid choice might be best for you. 

#1 Rated For Automated Funding Of Investments

#1 Rated For Automated Funding Of Investments

Automate your retirement investing through your spare change and intelligent Robo advisor services. Setting up an account takes less than 5 minutes. They now offer no-fee checking as well. If you want to put your spare change to work to help grow that retirement nest egg, there is no better product on the market than Acorns.

Acorns App Phone 1

If you have a $100,000 minimum to invest, then you should strongly consider looking into Personal Capital. All three are great companies, but make sure you choose the one that best fits your overall investment needs.

#1 Rated For Net Worth Analysis & Managed Investments

#1 Rated For Net Worth Analysis & Managed Investments

Hands down, Personal Capital is the best platform for you to calculate your net worth. Personal Capital also fills in all the gaps I tend to find with Mint as well. They also have a very robust portfolio management offering that is a hybrid of a managed and Robo advisor. The best part of all is that their net worth and portfolio projection tools are completely free to use. 

Personal Capital Screen Views Phone

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. Click here to learn more information.

Summary

Robo Advisors are a game-changer in the investment industry. They provide you a low-cost alternative to typical traditional high-cost managed portfolios but with the diversification, risk tolerance and goals you’re looking for. With so many options it is important to pick a brokerage company that has the tools, resources, funds options and technology that can provide you the best possible anticipated returns and overall experience. Robo Advisors are here to stay, they continue to involve and they could be a great option for you in your investment portfolio.

What are your thoughts in regards to Robo Advisors? Are you considering using one? Do you happen to use one already? What’s your experience been like so far? Please share your thoughts in the comments section below.

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Frank Makrides

Frank Makrides

Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.

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