After the Great Recession of 2008, many Americans stepped back from investing and developed a strong sense of apprehension about using their savings to grow wealth. Considering how long it takes to put aside a modest nest egg, it's not surprising that most people were wary of the risks of loss that they associated with investing. However, people are returning to investing as a means of growing wealth for retirement, family emergencies, and to fund yearly vacations or educational opportunities.
One reason people are embracing investing again is that it has become easier than ever with new online resources. Robo advisors are helping the average person invest savings in a new way. Fees are lower and the use of artificial intelligence helps minimize the risks of losing money. While this all sounds promising, it is still important to understand how a robo advisor works and how it can help you grow your own savings.
What is a Robo-Advisor?
A robo advisor is a software application that uses artificial intelligence to help users manage their investment portfolios. Essentially, these apps take the place of a live investment advisor for those who can't afford an advisor's fees or for those who want just a little help managing their investments. An app provides the insight and service you would normally get from a professional advisor, while letting you maintain tighter control over your portfolio.
Once you create an account in a robo advisor application, you can set the app to select investments for you. The robo advisor will abide by fund allocations you set to choose the best investments for your money. As your investments fluctuate, the app will redistribute your investments to maintain the original allocation settings. While a robo advisor application isn't typically free, the fees are usually much lower than those you would pay to a human advisor. Depending on the app, you may pay a flat fee of between $15 to $200 per month, or a percentage equivalent to .15% up to .50% of your account's total value.
How Does a Robo-Advisor Work?
Much like hiring a human investment advisor, using a robo advisor starts with the creation of the user's account. Once the initial sign-up process has been completed, the user will have to supply their financial information, such as investment goals, risk tolerance, and the user's current financial situation. The application will use this information to select the best investment strategy for each user.
Even when you're willing to take bigger risks, using the robo advisor helps you invest more safely than you would do on your own. The problem that most do-it-yourself investors run into is that they don't take the time to research their investment choices. As a result, they lose money and give up on investing in frustration. However, the robo advisor uses AI technology and data analytics to evaluate stocks and funds for the user. This eliminates much of the risk associated with investing.
As your robo advisor starts investing for you, you still maintain control. You can select from a variety of financial products that the app chooses for you and you can adjust your risk tolerance as you progress. The app will even select which sectors offer the greatest opportunities for growth, so you won't have to worry that you're investing in pharmacology when tech stocks are showing the most potential. The robo advisor app does the research for you, letting you make informed investment decisions.
The Most Commonly Used Robo Advisors
While there are many robo advisors currently on the market with more sure to debut in the near future, each one has its advantages and disadvantages. Below is a brief overview of the top-rated robo advisors currently available.
- Betterment – This was among the first robo advisors to hit the market, which has given it time to become the best. Fees range from .25% up to .40%, but Betterment offers 12 months of free management to new subscribers. Additionally, the app doesn't require a minimum opening deposit, allowing investors of all types to get started.
- Wealthfront – This robo advisor does require a $5,000 opening deposit, but fees are waived for this initial amount. That means you'll only be paying a .08% APR on ETF fees.
- Schwab Intelligent Portfolios – Yes, Charles Schwab has recognized the value in offering robo advisors to the public, creating their own app. The Schwab Intelligent Portfolios app charges no management fees and no advisory fees, which makes it stand out among other robo advisors. There is a $5,000 minimum deposit, however.
- Wealthsimple – Many investors aren't just interested in growing wealth and are choosing companies that align with their social, environmental, or political views. Wealthsimple allows you to focus your investments in this way, although you will pay a slightly higher management fee. You can expect to pay up to .40% on your account, depending on the size of your annual balance. However, your initial $5,000 deposit comes with fee-free management and, once you grow your capital to over $100,000, you'll earn lower fees.
There are more robo advisors on the market and each one offers different features. Each advisor uses technology in a different way as well. Before choosing your robo advisor, it's wise to research each application and determine which one will best help you grow your wealth.
