Where Robo-Advisors Excel
There are areas where robots manage money much better than individuals or traditional financial advisors. In this case, the robot is a money management platform that operates using advanced algorithms.
Fees and Minimums
Once the algorithm company is established, robo-advisors have low annual costs (or no costs at all), whereas personal financial advisors need to earn an annual salary. The average financial advisor earns about $90,000 annually. Clients pay these salaries through varying fees, either based on the hour or as a percentage of their total returns or assets. In contrast, robo-advisors can have fees as low as 0% in the case of Schwab’s Intelligent Portfolios. Additionally, advisors may require clients to have a large minimum account balance. Conversely, robo-advisors come with low (or no) minimums for accounts. This makes investing more accessible for those with less to invest.
Rebalancing
Rebalancing refers to buying and selling investments to adjust your mix of stocks and bonds and other investments. Financial experts recommend rebalancing your portfolio regularly to ensure you maintain your preferred mix of asset classes. This diversification can reduce volatility.
Matching Market Returns with Underlying Returns
The specified market return may not seem impressive, but the temptation to outperform the market using active mutual funds is often futile. In a 2021 study, less than half of actively managed funds beat the market on an annual basis, and that figure drops to only 25% when considering a 10-year period.
What Robo-Advisors Cannot Do (Most Often)
Robo-advisors have many advantages, but there are some tasks that should be left to humans – especially for high-net-worth individuals or those with complex needs.
Creating a Comprehensive Financial Plan
If you have a high net worth, a robo-advisor may not be sufficient for you. You may need a trusted advisor who can look at your entire financial picture, including estate issues, tax considerations, and life insurance considerations. A full-service financial advisor can manage your investment portfolio while tracking your broader economic concerns.
Selecting Specific Financial Assets
Robo-advisors are often limited in the types of investments they have available. These services may not work if you want to choose specific investments, such as individual stocks, bonds, currencies, or options. Additionally, robo-advisors are generally not exposed to less common instruments like peer-to-peer financing, limited partnerships, and hedge funds.
Beating the Market
Most robo-advisors often follow an index fund investment strategy. This means they will typically match market performance. However, they won’t outperform it. Some services, like Betterment’s Smart Beta strategies, have unique algorithms that try to beat the market, but they haven’t been tested enough to prove or disprove their effectiveness. On the other hand, human advisors also have a mixed record when it comes to beating the market.
Frequently Asked Questions
How do robo-advisors work?
What amount can you earn with robo-advisors?
Source: https://www.thebalancemoney.com/what-robo-advisors-do-better-than-financial-advisors-4154903
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