Should You Use a Robo-Advisor?

We break down the pros and cons.

As our world becomes increasingly digitized, it’s no surprise that investment management has followed suit— online investment platforms, also known as robo-advisors, are popping up everywhere.

Women are especially taking notice: According to a 2016 survey by TD Ameritrade, more women than men currently use a robo-advisor (16 percent of women versus 10 percent of men).

And as more Americans are taking an active role in managing their finances (60 percent describe their investment approach as “hands on,” according to a 2016 Merrill Edge Report), robo-advisors offer an easy, unintimidating tool for doing it — and doing it well.

Rather than relying on (and paying for) a human advisor to suggest and make changes to your investment portfolio, these platforms use computers, crunching complex mathematical algorithms to automatically adjust your investments and create affordable investment portfolios. In some cases, the platforms use “hybrid” investing, which relies on a combination of expert insight and online management.

Below, we explore the pros and cons of using a robo-advisor— and which ones to try out, should you decide to take the plunge.

Pros of Robo-Advisors

Of course, robots can’t take the place of humans. But when it comes to investing, some people think they offer unique advantages to human advisors. Here are just some of the benefits of robo-advising:

  • Invest with just a little. “Many financial advisors give off the vibe that they won’t get out of bed for less than $1 million in assets, and we don’t all have that lying around,” says Kerry Moriarty, a 29-year-old financial advisor who’s helping to launch Cinch Financial, a new financial software platform. “Many robo-advisors let you start investing with affordable fees for significantly less.”
  • Avoid human bias. “Humans inevitably incorporate a significant amount of bias into the decision-making process,” says Bert Mouler, founder of Profluent Capital, a robo-advisory firm in San Francisco, Calif. With automated advising based on mathematical formulas, you avoid that bias and make investments or trades based on data.
  • Save money. In most cases, robo-advisors are much cheaper than human advisors, which means that you spend less on fees and have more money to invest, growing your portfolio more quickly.
  • Avoid personality differences. The average financial advisor is nearly 60 years old — and usually male — which may make it hard to relate to the situations that women clients face. Moriarty explains: “As a 29-year-old [woman]… I’m not sure [that the average advisor] has had to live through the decision of whether or not to continue working after having children or how to think strategically about the impact of that decision on my retirement and financial future. Not to typecast all older male advisors, but there is certainly an appetite for financial advice coming from someone — or something — a little more modern and in sync with the way I live my life. Cue robo-advisors.”

Cons of Robo-Advisors

Although automated platforms offer many advantages, they aren’t perfect. Some of the disadvantages of robo-advisors include:

  • It’s hard to get a handle on your overall financial situation. In most cases, robo-advisor technologies are focused on investments and retirement, not usually on getting out of debt or building an emergency fund. “Longer term planning is important, but it’s less relevant if you’re not in a stable position today,” Moriarty says. “At least a human advisor can give you some insights on solving for the short term before turning to longer-term strategies.”
  • You don’t get personal advice. Yes, we’re all rational people, but there is always “a huge emotional component involved” when it comes to finances and investing, Moriarty says. “Working with a human advisor can really help balance your logical perspective with your emotional one when it comes to considering any financial decision. That nuance is certainly a bit harder when you’re interacting strictly with technology, like a robo-advisor.”

Increasingly, investing platforms are finding ways to combine both personal and automated services to help diminish the disadvantages.

Trying It Out

Want to try your hand at robo-investing, or find a hybrid of automatic and expert financial management? Here are several of the leading platforms to consider.

Acorns
Focused on micro-investing, Acorns makes it easy to invest a few cents or dollars whenever you can (the app rounds up every purchase to give you regular contributions) and manages the resulting investment account to boost your net worth.

Betterment
Another robo-advisor, Betterment uses a diversified portfolio and automated rebalancing to earn high returns.

Merrill Edge Guided Investing
Merrill Edge Guided Investing is an easy, low-cost way to invest online, combined with a professionally-managed portfolio.

Personal Capital
Personal Capital’s free personal finance tools include a free retirement planner, and the site also offers automated portfolio management services, for which they charge a fee.

Profluent Capital
An artificially intelligent portfolio management system, Profluent Capital uses algorithms to automatically analyze various portfolios, select which instruments to trade, and design trading systems.

TD Ameritrade Essential Portfolios/Selective Portfolios
TD Ameritrade’s Essential Portfolios and Selective Portfolios are also great options. Essential Portfolios offers a digital-first robo-advisor, while Selective Portfolios pairs a robo-advisor with human contact.

WorthFM
DailyWorth’s own WorthFM allows you to create and fund your investment and retirement accounts, providing ongoing education and input from WorthFM financial advisors.

  • Carol McKinney

    Has anyone heard of it used the Stash app?

  • Kana

    Great article. I’d like to point out that in the paragraph about TD Ameritrade’s robos, you’re missing the word “Essential” at the beginning of the second sentence.