When it comes to managing your investment portfolio, traditionally, investors have had two options: Partner with a financial advisor, or build and manage your own investment strategy.
But these days, a third option is gaining traction. One that fits somewhere in the middle.
Robo-advisor services refer to automated portfolio management that’s done using algorithms and programs. Unlike human advisors, who watch and respond to the market, and adjust their clients’ investment portfolios accordingly, robo-advisors are all online. They offer 24/7 basic investment management and asset rebalancing, typically for a small flat-rate or assets under management (AUM) fee.
How do robo-advisors work?
When you create an account with a robo-advisor, before you can start investing, the program will ask you several questions about your risk tolerance, investment goals, cash needs, time horizon, and other financial details. It will then use this information to build an automated investing model that aligns with the details you provided.
Once you deposit funds into your robo-advisor account, the system will build an investment portfolio for you, and begin automatic rebalancing to maintain your chosen risk tolerance.
While robo-advisors don’t offer the kind of investment advice a human financial advisor can, and they may offer more limited investment choices, robo-advisor fees tend to be lower than those charged by traditional financial advisors. That, plus robo-advisors’ simple setup, makes this investment tool a common choice for investors with basic support needs.
If your only need is investment management, a robo-advisor can be a smart option.
Our philosophy on robo-advisors is that any tool that helps new investors or investors who do their own financial planning can be a benefit to them.
Remember, the average retail investor rarely—if ever—beats the market. In fact, most investors that try to “time the market” on their own end up losing much more than they would have simply by investing in exchange traded funds (ETFs) or low-risk asset classes.
Robo-advisors are a step up from timing the market and self-advising for two main reasons:
- They maintain your ideal investment balance. As the value of your stocks, bonds, and other assets rise and fall, automated investing continually rebalances your investment portfolio, so your risk remains constant.
- They encourage you to weather turbulence. When the market dips, like we saw in March 2020, many investors panic-sell at the bottom—and buy back in too late. Robo-advisor platforms make it just a little more difficult to sell quickly, which can be the stop-gap you need to avoid an emotion-driven rush sale.
But robo-advisors are no replacement for financial planning services.
If you’re not interested in working with a traditional financial advisor or investment manager, and you don’t want a professional managing your wealth, a robo-advisor can be a good alternative. Especially if you’re not able to tune into the market 24/7.
However, there are very few investors who wouldn’t benefit from the dedicated support of a human advisor. Someone who knows their story, understands their financial goals, cares about their family, and wants to see them build a legacy that lasts.
When you work with a traditional advisor, like those on our Tax and Advice Teams here at Cook Wealth, we’ll do everything we can to protect you from market turbulence. We continually rebalance your portfolio, and focus on the personalized investment strategy that best fits the specific goals that matter to you.
When it comes to management fees, what you save could cost you.
One of the most common misconceptions investors have about robo-advisors, when compared to traditional financial advisors, is that you’re getting a similar service from robo-advisors for a lower cost.
However, robo-advisors have lower fees because they don’t do nearly as much as financial advisors. Creating and managing your investment plan is just one of the dozens of things our tax and financial advisors do for our clients.
Take a look at the services most robo-advisors offer:
- An investment portfolio built around your questionnaire answers
- Automatic rebalancing
- Basic tax loss harvesting
- General investment advice articles and online financial planning tools, like calculators and spending charts
Compared to the services and support offered by human financial advisors:
- A diversified portfolio with a wide mix of assets, intentionally built around your financial goals, investment preferences, and unique family needs
- Personal finance support, like debt management or help with budgeting
- More comprehensive financial planning, including advice on saving for your child or grandchild’s education, buying a new home, comparing insurance options, establishing an estate plan, starting or selling a business, and more
- Tax-efficient advice that takes into account your specific income level, end-of-year bonus, available tax deductions, potential capital gains taxes, charitable contributions, and more
Robo-advisors simply don’t have the capabilities to offer hands-on, one-size-fits-you support that evolves with your financial situation. That’s why we advise any investor who wants their investment portfolio to grow and change alongside their needs to work directly with a team of human advisors—who know your name, care about your goals, and are invested in your success.
If you value what financial advisors bring to the table, let’s connect.
At Cook Wealth, our comprehensive financial advising, investment management, and tax guidance help you plan for a confident financial future—and enjoy life now.