The Ultimate Guide to understanding what Robo Advisors are

Robo advisors have been at the forefront in helping investors meet their investment goals. Robo advisors refer to online services that make it easier for investors to get started along their financial investment journey and ensure that the investors meet their financial goals. They do so by providing low-cost investment aid as well as no account minimums.

Still confused about what Robo advisors are? Perhaps this will help; Have you ever wished that a robot could do your laundry or help to drive your car because you feel tired to do it yourself? Robo advisors offer similar appeals. The Robo advisors do not provide such services in their entirety. What they do is offer users a relatively valuable way of investing. To better understand this, let us look at how Robo advisors work.

How Robo advisors Work

Robo advisors can also be called automated investing services. They are basically online advisors that will guide you through your investment journey. They work by using sophisticated computer algorithms and complicated software that help in building and management of investment portfolios.

The Robo advisors’ services include automatic rebalancing and tax optimization. Robo advisors rely on artificial intelligence and machine learning techniques to help investors with their investments. There is absolutely in human intervention. However, the case might be different with a few exceptions as some Robo advisors have human personnel to help make more informed decisions.

Because of their speed and convenience, Robo advisors will help you start your investment journey as quickly as possible. But how much will it cost you to seek the services of Robo advisors? We answer this question in the following segment.

How Much Do Robo advisors Cost?

Robo advisors are cost-effective. As a matter of fact, they cost cheaper than the human financial advisor. Most Robo advisors’ services come with a service fee that ranges from 0.25% to 0.50%. The fee is referred to as the annual management fee. However, it is essential to note that not all Robo advisors charge this fee. Some Robo advisors, such as the SoFi Automated investments, offer free Robo advisors services to their customers.

The annual management fee is usually the percentage of assets under the care of the Robo advisors’ service. For instance, if you have $10,000 as your account balance and use Robo advisors services that charge an annual management fee of 0.25%, all you will pay for the whole year is $25. As you can see, the Robo advisors’ services are so cost-effective. Another good thing is that the fee is not charged at once. Most Robo advisors will prorate the fee either monthly, semi-annually, and quarterly.

Unlike with the stock brokerage accounts where you have to pay transactions, or commission for the purchase or sale of investments, with Robo advisors, such fees do not apply. They frequently waive such charges, which makes them even more convenient.

There are several Robo advisors that you can choose to work with. However, not all of them will offer equal services. For this reason, there are a number of factors that you should consider when choosing a Robo advisor to work with. They are as follows;

1.     Type of Account

Different Robo advisors offer different account types. For instance, some provide individual retirement accounts and taxable accounts. Some Robo advisors also provide trust management services, while a few will help investors manage their 401(k). Before choosing a Robo advisor, you must know the type of account you require and do your research to ensure that you choose the one that meets your requirements.

2.     The Minimum Investment Requirements

Before choosing to work with a Robo advisor, you must know your budget and the minimum requirements for each Robo advisor under your consideration. Some Robo advisors will require you to have a minimum of $5000, while others will require as little as $500 to get you started. The point here is to choose what is good for you.

3.     Investment Selection

One thing you have to know about Robo advisors is that they essentially create portfolios from low-cost ETFs (exchange-traded funds). ETFs are basically baskets of investments that look to reflect the behavior of a particular index. A good case is the S&P 500 index fund. You will incur the fee charged by these funds alongside the fee charged by the Robo advisors. It is vital that you put this into consideration when selecting a Robo advisor.

4.     Portfolio Recommendation

The first procedure you will have to go through when signing up with a Robo advisor is filling out a questionnaire. The questionnaire aims to assess your levels of risk tolerance, your investments preferences, and the goals of your investments.

It would be best to approach all questions in the questionnaire with utmost importance because they will be used by the Robo advisor to assess your priorities and recommend an ideal portfolio. However, you will always have the power to veto the recommendation if you prefer a different option.

What to Expect from a Robo Advisor?

The following are some of the services that you should expect from a Robo advisor;

·      Regular portfolio rebalancing. The portfolio rebalancing is usually done automatically and at set intervals. For instance, you should expect the portfolio rebalancing after every month, three months, or six months. It all depends on the kind of Robo advisor you have picked.

·      Robo advisors offer tools that are important for financial planning. Such tools include calculators and many more.

·      You should also expect tax-loss harvesting alongside other tax strategies for your taxable accounts. This is important because you will not have to go through the hassle of taxation of your investment returns.

Best Robo advisors that you should work with

After going through all these details, you are now anxious to know some of the Robo advisors you should choose to work with. It is always essential that you follow up with your research to select the best Robo Advisors. The following table summarizes some of the best Robo Advisors. It touches on what each Robo advisor is best for, the trade commission that applies for each, and the account minimums you require to start investing with each of them.

Robo Advisor

Best For?

Trade Commission Fees

Account Minimum

Betterment

Easy access to human, financial advisors

0.25% to 0.40%

No account minimums for Digital account, $100K for Premium

Wealthfront

College saving scheme

0.25% after the first $5,000

$500

SigFig

Investing a minimum of $2000

0.25% after the first $10,000

$2,000

Charles Schwab

Low fees

None

$5,000

Ellevest

Investment driven towards a specific goal

None, however, monthly membership fees ranging from $1 to $9 apply.

None

Ally

Best for beginners

None

$100

TD Ameritrade

Provides decent banking features

0.30%

$500

SoFi

Free and cost-effective investment option and easy CFP access

None

None

Fidelity

good for retirement saving schemes

 $3 per month after the first $10,000

$10

Wealthsimple

Best for social responsible investing

0.40% to 0.50%

None, however, a $100,000 for the Black plan, $500,000 for Generation plan apply.

Wrapping in Up

Robo advisors are digital platforms that aim to provide automated financial planning services without (or with minimal) human intervention. A Robo advisor will collect all the relevant information through online questionnaires. The Robo advisor will then use the information collected to offer informed financial advice and help investors invest their assets. It is always vital that you take your time to ponder every question and ensure that the answers are as accurate as possible. This is because any misinformation could mislead the Robo advisors into making wrong decisions. And that could negatively affect your investments.

This article has explained everything you need to know about Robo advisors and how they operate. It has also given you a list of some of the best Robo advisors with their features. I hope you find this article helpful in guiding you through making informed decisions about Robo advisors and the ones you should work with.