Paying an expert to manage your investment portfolio can take a deep cut out of your profits. Today, many people avoid high management fees by using robo advisors. Before you choose a robo advisor for your portfolio, you should learn a little about how they work and what features to expect.
The Rise of Robo Advisors
Robo advisors were introduced to online investing in 2008 as a way for people to manage their portfolios without having to interact with investment professionals. Robo advisors use complex algorithms to help investors earn higher returns.
Since robo advisor software can examine countless data points, they often provide more accurate advice than the professionals who charge large sums for their expertise.
Popular Robo Advisor Features
Software developers can build robo advisors that manage a wide range of portfolio assets, including real estate, stocks, bonds and commodities. More often than not, though, companies design robo advisors to specifically manage exchange-traded funds (ETF).
ETF portfolios operate similarly to index funds. Like index funds, ETF portfolios can contain a variety of underlying investments. Unlike index funds, ETFs rarely charge commission fees.
When comparing robo advisors, you will find that many of them share features. Some of the most common features include:
- Low account minimums.
- Management fees under 0.40%.
- Tax loss harvesting.
- 401(k) guidance.
- Taxable accounts.
- Mobile apps.
Many robo advisors can give you advice about IRAs, Roth IRAs, SEP IRAs and other retirement plans.
Should You Use a Robo Advisor?
Robo advisors work well for individuals who want to invest relatively small amounts of money. Betterment, one of the most popular robo advisors, doesn’t have a minimum deposit amount. Minimum deposits for other robo advisors usually vary from $2,000 to $25,000.
You may also want to use a robo advisor to avoid high annual fees. Plenty of robo advisors do not charge annual fees. Those that do charge fees usually take less than 0.50 percent of your account balance.
Some investors worry that they shouldn’t take financial advice from software. If you feel that way, then you should choose a robo advisor that lets you speak with financial advisors. Keep in mind, however, that getting human advice may cost extra.
Robo advisors have been around for about a decade, so they have proven that they can manage portfolios successfully. Before you choose a robo advisor to manage your money, you should compare several options to make sure you select one that can help you reach your financial goals.