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- Robo-advisers have been growing in popularity for several years thanks to low costs and ease of use.
- Also called managed portfolios, most robo-advisers use an algorithm to match customers with professionally designed portfolios.
- Most robo-advisers build portfolios with low-fee, exchange-traded funds.
- Some robo-advisers include the option to discuss your investments with a human financial planner, which can put worries over computer-managed investment accounts to rest.
- Use Blooom to analyze your 401(k) today and see how you can grow your retirement savings »
If you want to save and invest for retirement with minimal effort, a robo-adviser might be exactly what you’re looking for. Robo-advisers around the world have grown to nearly $1 trillion in assets under management in 2020, a 19.3% annual increase, according to Statista. The number of people who invest with robo-advisers grew by nearly 50% from the prior year.
There are plenty of good reasons to invest with a robo-adviser. Here are seven top reasons why you might pick a robo-adviser to help you save for retirement.
1. They make investing easy
The first reason to invest with a robo-adviser is that they make investing easy. When signing up, most robo-advisers ask you to fill out a short questionnaire. You’ll answer questions about your age, investment goals, risk tolerance, and other factors that the algorithm needs to pick your ideal investment portfolio.
“The robo-advisers do a great job of offering an investment that is diversified and low cost,” says Michael Anderson, a Certified Financial Planner and owner of Maranatha Financial. “You’re going to have an allocation that’s smart.”
Based on the results of your signup survey, the robo-adviser will take care of just about everything. You can relax knowing that your portfolio is working toward your ideal retirement. If you want to make changes or updates, you can log in at any time and update your answers to see if you get a different portfolio result.
2. Robo-advisers generally cost less than traditional advisers
Many traditional advisers charge based on assets under management. Most charge an average of about 1% of your assets per year. That means if you have $10,000 invested with them, they would charge you $100 per year. When your balances hit $100,000, they charge $1,000 per year, and so on.
Robo-advisers tend to charge much, much less. Betterment, for example, charges 0.25% per year for its basic account and 0.40% if you want access to a human financial adviser. The robo-advisers from Charles Schwab and SoFi don’t charge any added management fees at all. In either case, you’re spending a lot less than you would with a traditional financial adviser managing your portfolio.
3. Investments are customized to your goals
The survey you take when signing up doesn’t ask random questions. Each question is designed to help understand your investment timeline and what’s needed to help you retire the way you want. When you’re done with the survey, the robo-adviser will assign you to a portfolio designed for people in similar financial circumstances to you.
Depending on how much you invest, the robo-adviser will allocate your dollars in the right proportions for your investment goals. As you add more to your portfolio over time, the adviser will keep your investments in balance and weighted correctly for your investment time horizon. You never have to think about picking stocks or funds. The adviser will do it for you.
4. Portfolios are built and managed by human investors
Robo-advisers might conjure up images of the robots walking around in the hit movie “I, Robot,” but rest assured there are no actual robots choosing your investments. In fact, the portfolios robo-advising customers are assigned to are built by professional investors. The human kind.
Betterment and Wealthfront portfolios are based on modern portfolio theory, an investment strategy that earned its creator, Harry Markowitz, a Nobel Prize. Brilliant computer scientists, economists, and investors work together to create algorithms and portfolios. Computers just execute on the human-developed strategy.
5. Automatic portfolio rebalancing
Over time, it’s natural for investments to drift away from your target balance. For example, if you are looking to have a portfolio that’s 75% stocks and 25% bonds, a strong stock market year could lead to a portfolio that’s 80% stocks and 25% bonds even though you didn’t buy or sell any assets.
“Automatic rebalancing helps tremendously with keeping the allocation on target for your retirement objective and risk levels,” says Anderson. “If you don’t have rebalancing done, your account may drift into an allocation that isn’t the right fit for you. Robo-advisers have a wonderful algorithm that will keep the allocation right where you want it.”
With a robo-adviser, the computer will notice that you’re no longer at the target 75/25 balance and will automatically sell some stocks and buy bonds to get you back in the right balance for your investment plan.
6. They won’t send your money to expensive, actively managed mutual funds
Not all financial advisers follow the same, ethical methods. Some charge clients flat or percentage fees and nothing else. This is called fee-only financial advising. Others may get a commission from certain investment funds or insurance companies for sending client money their way. And, because of the kickback, many do so even when it’s not in their client’s best interest.
“There’s a lot of empirical research that talks about returns and high fees, which actively managed mutual funds typically charge, that can cause a serious drag on overall returns,” says Anderson.
This won’t happen with a robo-adviser. Robo-advisers are fee-only investment managers. They typically don’t use expensive mutual funds at all, only low-cost ETFs. This eliminates a common conflict of interest that can cost investors dearly over time. If you do work with a human financial adviser, try to only work with a fee-only planner that works in a fiduciary capacity.
7. Stay on track for retirement without thinking about it
Even seasoned investors often wonder if they are making the right investments or second-guess if they are on track for retirement. With a robo-adviser, you know you’re on track for your goals even when you’re not actively working on it. While you are at work, sleeping, spending time with family, or enjoying a favorite hobby, your robo-adviser’s computers are working to keep your investments on track.
Just turn on an automatic investment plan where you add a little to your portfolio every payday or every month and you can rest assured that your funds are at work to help you reach your dream retirement.