Crafting a smart investment portfolio isn’t just for multimillionaires with a slew of financial advisors at their disposal. Anyone can begin investing at any stage and with any budget, especially when you choose a robo-advisor instead of a traditional brokerage firm. But in case you’re wondering whether a robo-advisor is a good investment strategy, we’ll lay out the benefits as well as the negatives associated with this type of platform.
Find out how robo-advisors work, as well as the advantages and disadvantages. That way, you can find out if a digital platform truly is the best option for your investment funds.
What Is a Robo-Advisor?
A robo-advisor makes it easy to invest through a digital platform powered by an algorithm that makes automated investment decisions to try and maximize your results. In most cases, you get started by answering questions about your financial goals and current situation. Using those inputs, the robo-advisor creates an investment strategy for you and purchases assets with your funds.
While most investment brokerages have been using automated portfolio allocation software for quite some time, robo-advisors bring that technology to the masses. Plus, most major players also employ tax-loss harvesting strategies so that you can keep your portfolio balanced while minimizing your taxed capital gains. The process is simple and requires little-to-no management on your end. You can also access your account information 24/7 since everything is housed online. If you have questions or concerns, you can reach out to customer support to clarify those matters.
Wondering why a robo-advisor is a good investment platform? Here are the two most popular reasons why people opt for this type of investment rather than more traditional routes:
Low Fee Models
Since robo-advisors use an automated system that relies very little on human interaction, the fee structure is much less than with a typical financial advisor. You’ll generally be charged an annual flat fee of 0.5% of your managed assets or less, depending on your selected platform and the amount of money in your account.
A robo-advisor is also a good investment if you’re just getting started and don’t have a lot of money to invest in the beginning. The account minimums are either low or non-existent, unlike large brokerage firms that require accounts with tens of thousands of dollars (or more).
Robo-advisors excel at continually rebalancing your investment portfolio based on your financial goals and risk tolerance. It’s a great way to reduce volatility and make sure you’re diversified in a way that works for you. While these services are certainly doable on your own or with a human advisor, a robo-advisor makes these changes consistently based on your customized preferences.
Opting for a robo-advisor is a good investment for a lot of people, but there are some situations where other options could be more beneficial. Here are some downsides to automating your investment strategy through a strictly digital platform.
No Comprehensive Financial Planning
If you’re a high net worth individual (or close to it), a robo-advisor may not provide you with the necessary sophistication to truly maximize your finances. You may want additional guidance on related topics like your taxes or estate planning needs, not to mention alternative investments such as real estate. Some robo-advisors do add an option for a plan that includes your own financial advisor, but it’s important to analyze those extra costs as well as the services available.
Most robo-advisors include a standard offering of stocks, bonds, and ETFs. At most, you’ll have the ability to choose from about 25 funds, and sometimes even less depending on your selected platform. With a true financial advisor, you can personalize your investment strategy to a much more diverse and robust degree. If you’re interested in trading individual stocks, for example, you’ll need to look beyond a standard robo-advisor. Other exclusions include peer-to-peer lending and currency investments.
Rebuild Your Credit Before Investing
A strong credit score isn’t required to invest with a robo-advisor (or any other financial advisor, for that matter), but getting better interest rates on your existing debt can help free up extra cash in your budget to invest each month.
If your credit score isn’t reaching its true potential, then schedule a free consultation with Ovation Credit today. We’ll give you a personalized plan to repair your credit so you can focus your energy on your investment strategy rather than your credit repair strategy.