Finances FYI Presented by JPMorgan Chase
Managing money can feel very overwhelming, especially if you’re juggling bills, trying to meet your savings goals, and working to build wealth. Luckily, using a robo-advisor can help take away some of the stress and uncertainty that comes with learning how to manage your finances. Most of these digital platforms are a one-of-a-kind, modern system of acquiring individual financial and investment advice at inexpensive rates, all without ever having to converse with someone.
In this article, we’ll outline the pros and cons of using a robo-advisor and how they can be beneficial for you.
What Is a Robo-Advisor?
A robo-advisor is an online financial tool that can help make investment decisions on your behalf. After you give them some information about yourself, like your income level, financial goals, and the risk you’re willing to take, the robo-advisor will make suggestions about the kinds of investments that might be right for you.
After you decide what to invest in, the robo-advisor will help keep an eye on your accounts and can even buy and sell on those investments to try to keep you on track for your goals.
Why Are Robo-Advisors So Popular?
Robo-advisors have become popular among newer investors and are even offered by bigger financial services because:
- They’re easy to use.
- They are less expensive than using a traditional advisor.
- They require smaller deposits to get started.
Pros of Using a Robo-Advisor
Robo-advisors offer many benefits, such as:
- Low management fees: Many robo-advisors base their fees on the amount of money in your account, often ranging from 0.25% to 0.89% per year. Human financial advisors, on the other hand, typically charge a 1% fee to manage your portfolio of investments.
- Hands-off management: Once you decide where you would like to invest your money, the robo-advisor will track it and automatically rebalance your accounts based on your goals and risk tolerance.
- No guesswork: If you’re new to stocks and investments, a robo-advisor might be the perfect tool for you because they use advanced technology to build your ideal portfolio, requiring little to no research on your end.
Cons of Using a Robo-Advisor
Even though robo-advisors are very convenient, they do have some downsides:
- Limited personalization: Many robo-advisors have preset investment strategies, so it’s harder to choose or avoid specific investments once they’re managing your portfolio. They also may not be able to effectively assist if you have a more complicated financial situation, like owning your own business.
- No human support: If you’re confused about your investments or have some difficult questions, using a robo-advisor means there’s limited human interaction, and it might not be able to answer your questions or deal with your concerns appropriately.
- Hidden fees: Some platforms charge additional fees for premium features or access to human advisors. Be sure to read the fine print before you sign up for them.
When You Should Use a Robo-Advisor
If you’re interested in investing, robo-advisors might be a great tool if you’re:
- New to investing and unsure where to begin
- Busy and want to grow your wealth but don’t have time to manage your accounts personally
- On a budget, as robo-advisors are usually more affordable
When to Avoid Robo-Advisors
You might want to avoid robo-advisors if:
- You’re dealing with more complex finances, like receiving a large inheritance or balancing multiple sources of income.
- You want active management or more personalized investment options.
- You prefer working closely with a human.
In these cases, it would be better to look for a hybrid model (a robo-advisor + easy access to a human advisor) or a full-service, in-person financial planner.
How to Use a Robo-Advisor the Right Way
- Start small: Many platforms will let you start with a small investment. Test it out before committing to larger amounts and risking higher losses.
- Be consistent: Set up regular deposits so your accounts grow over time.
- Check in frequently: While robo-advisors will manage the day-to-day aspects of your accounts, it’s still important for you to check in and make adjustments or update your personal goals.
- Don’t worry about short-term changes: The stock market fluctuates daily, and these platforms are built to provide long-term investments. Keep an eye on your accounts, but don’t worry if there are some minor changes in your investment status.
Robo-advisors aren’t perfect, but they are a great tool for money-conscious adults who are interested in starting to invest. If you’re looking for an affordable, low-effort, beginner-friendly solution, robo-advisors might be the perfect solution for you. Just make sure to pick a platform that works for you and your goals.
