156: What is a Robo Advisor?

Robo Advisors is becoming one of those hot buzzwords that you’re hearing thrown around everywhere. In the finance industry, automation is everything, so it’s no surprise that these services are creating that buzz. What is a Robo Advisor? Do I need one? Read on to find out! 

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What Is A Robo-Advisor?

A Robo-advisor, in simplistic terms, is a digital automated service that relies on algorithms and software to make decisions about how to invest your portfolio. Robo-advisors typically do this through taxable accounts, like a brokerage account and through tax advantage accounts such as IRAs or individual retirement accounts. 

All of this is done with little to no interaction from a human at all. It’s all run by a computer.

What A Robo-Advisor ISN’T

It is not some magical artificial intelligence that is going to solve all your financial problems and take your $5 and turn it into $20 million. I know. What a bummer.

While a Robo-Advisor isn’t a ‘get rich quick’ service, It IS a perfect tool if you’re looking for a service that tackles a few tasks efficiently.

What Is A Robo-Advisor Best At? 

Balancing a portfolio

A portfolio is just a fancy way of saying the collection of investment products you have. It could be stocks, it could be bonds, it could be cash, but when you’re developing your portfolio, or choosing your investment products, you want to have a varied selection of investment items. Typically you choose some type of percentage breakdown between stocks, bonds, and cash.

For example, if you’re young, you may want to go very aggressive and invest 90% in stocks and only 10% in bonds.

Over time, you receive investment returns on these products. The mixture that you chose can shift. Knowing that these percentages change, you may end up with 95% stocks and only 5% bonds – because you receive so much more of a return on your stocks. 

To maintain an ‘even’ level of risk, you need to sustain those percentage breakdowns. When these breakdowns become out of balance, you typically manually balance those items to reflect your chosen percentages. 

Robo-advisors can do that for you automatically.

Optimizing Taxes

This isn’t really a big issue if you have your taxes  in one of the tax advantage accounts, like an IRA. 

If you have taxes in a brokerage style account, you are liable to pay those taxes annually. 

There are strategies that help minimize the amount of taxes you owe every year from those accounts. 

Robo-advisors make moves within your portfolio to take losses when necessary to offset gains. This limits the amount of taxes that you pay within your brokerage style account.

It’s Convenient 

It’s really simple and easy to open an account. I’ve opened investment accounts and retirement accounts at a variety of different organizations. Typically, the process is not that easy to understand. 

It can be a lot of red tape, tons of new information thrown at you all at once, and you’re going through terminology you may not have heard before. 

With these accounts managed by robo-advisors, you can open them right from your phone.

Affordability

Robo-Advisors are comparatively cheap. Their annual fees can run anywhere from a quarter of a percent up to half a percent, which can be cheaper than going with an investment advisor. 

Investment Help Even if You’re Not Rich

Sometimes if you don’t have a lot of money to manage, investment advisors aren’t interested in taking you on as a client, because they’re not going to make much money off of you. 

Utilizing a robo-advisor can be a way for you to cheaply and easily access simple but effective tactics within your investment strategy.

What Are The Drawbacks?

Can’t I just do this on my own?

When it comes to robo-advisors, the elephant in the room is:  Couldn’t you just do all of this yourself? 

And yes, you actually could. 

You can open up a brokerage account and go with a company like Vanguard or Fidelity, and it will  probably be cheaper.

You can invest in a mutual fund with a really low annual fee. 

It could be a fraction of what you would pay with a robo-advisor, and call it a day. 

But the reality is that not everybody knows how to do this and not everyone is comfortable making these decisions. 

Using a Robo-advisor is a great introduction into the world of investing without feeling too overwhelmed. 

It’s not a complete financial solution

Having a Robo-Advisor isn’t going to handle all aspects of your financial life. This is not a replacement for a financial planner. 

Robo-Advisors won’t  help you with things like life insurance, drafting wills or trusts, or other major financial events that you’ll have and need in your life. 

A Robo-Advisor is just a piece to your overall financial plan.

Note-worthy Robo Advisors

If you’re interested in Robo-Advisor services, check out:

  • Wealthfront
  • Betterment
  • Fidelity 

I hope this helps you make your decision to try out a Robo-Advisor service. If you’ve ever used a Robo-Advisor, I’d love to hear all about your experience! DM on Instagram or email me to let me know!

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