What is a robo-advisor?

If you’re investing for retirement, you may find yourself contemplating between modern providers and traditional investment services. Many modern 401(k) providers use robo-advisor technology to automate portfolio management. Below is a comprehensive guide that can help you determine if robot investment is the right option for you.

What is a robo-advisor?

Also known as an automated financial advisor, a robo-advisor is an investment management service that uses computer algorithms to help you build a portfolio and manage your assets according to your goals and risk tolerance. Since it relies on software instead of a human advisor to manage your portfolio, robot investment is more cost-effective and can lead to higher long-term returns.

Robo-advisors use software to handle a wide range of tasks that previously required the costly services of investment experts, from automatic rebalancing to tax optimization. Robo-advisors are a strong option if you want to be hands-off with your investments and don’t have a complicated financial situation that requires you to have a direct relationship with a human investment advisor.

Sometimes, an automated financial advisor may offer access to human advisors who can answer questions about account management and investment planning. However, such services are often more expensive.

How robo-advisor investing works

After you sign up and fill out a survey with questions about your risk tolerance and retirement goals, the robo-advisor will create the best possible portfolio for achieving your goals. Then, it’ll automatically manage it to ensure you stay on the right track. It results in more objective and cost-effective investment services, making it an appealing option for investors from all backgrounds. A robo-advisor is also great during times of market volatility because it places a layer between you and and the temptation to panic-sell.

Benefits of robo-advisor investment

Investors with a wide array of portfolio sizes and goals are using a robo-advisor to invest and for good reason. Robot investment is one of the best ways to manage your investment funds with low fees and relatively low risk. In comparison to old-school human advisor investment, it’ll eventually enable you to generate more funds because it charges lower fees. A robo-advisor also offers tax-loss harvesting, and it uses proven index-fund tactics to help you to achieve your retirement goals more efficiently.

Should you use a robo-advisor to invest?

Robo-advisor investing is a suitable option for you if the following applies to you:

• You’re young and have more than 20 years until retirement.

• You have a simple portfolio and no accounts with other financial service providers.

• You’re lacking investment experience and unsure where to start.

A robo-advisor gives you a great starting point. Besides being comparatively cost-effective, it’s capable of creating a decent asset allocation in most cases. As your needs change over time, you can always move your funds to another financial service provider. By then, you may find that some of the same services have become more advanced and automate more tasks that used to require human intervention.

What are the best robo-advisors?

Currently, there are numerous robo-advisor investing service providers out there, which can make it difficult for you to choose the right one. Below is a list of the top robot investment services.

Wealthfront

Wealthfront has built trust with its clients by offering automated investment services. This includes low ETF expense ratios, automatic rebalancing, and an attractive stock-level tax-loss harvesting service, which adds up to 2% to annual investment performance for qualifying accounts. Additionally, it provides direct indexing for investment accounts with at least $100,000, which imitates ETFs with direct stock investments to maximize tax-loss harvesting benefits. Therefore, it’s also a good option for tax management.

ETF fees come with a weighted 0.08% APR at Wealthfront, which is one of the lowest rates on the market. The company also scores high marks for using Modern Portfolio Theory to create low-cost ETF portfolios. However, there's limited support for customers or prospective customers, and large accounts may be susceptible to expensive mutual funds.

Wealthsimple

Wealthsimple has $1.5 billion worth of assets under management. However, it stands out with its socially responsible investment options, allowing you to invest in organizations that align with your values. Its accounts feature automatic rebalancing, tax-loss harvesting, dividend reinvestment, and access to human advisors.

The company includes socially responsible investment options, free portfolio analysis, and access to human advisors. However, Wealthsimple has limited personal finance tools available (compared to other providers) and more expensive account management fees.

Human Interest

All of Human Interest’s 401(k) plans include the option to use automated investing. Because financial literacy is an important part of our company mission, Human Interest wants to ensure that setting up and maintaining a 401(k) isn’t too overwhelming. Because of this, we offer personalized investment education for employees at no extra cost.

Human Interest’s automated investing services help simplify investing decisions. Automatic investing with built-in diversification helps participants choose portfolios based on their personal circumstances. This helps maintain a rational investing strategy even during major upheavals in the market. And automatic rebalancing features an algorithm-based tool that can help keep risk in check—and even potentially enhance returns. This tool automates the buying and selling process and can realign portfolios to particular targets.

If you want to learn about robot investment or other ways to increase your retirement savings, feel free to get in touch with Human Interest.