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What is a robo-advisor? How Wealthfront, Betterment and others handle your money



Robo-advisor

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Get started with investments is not as scary as you think. You do not need a background in finance, you do not need thousands of dollars, nor do you need to pick out every stock and security your money buys. In fact, when you sign up for a robo-advisor, all you need is a few dollars and to answer a few simple questions.

To help you know if a robo-advisor is right for you, here is everything you need to know about these automated investment services.

What is a robo-advisor?

A robo advisor is an automated financial advisor and investment platform. The system uses a software algorithm to build and manage your portfolio so that you do not have to. When you sign up for a robot advisor, you answer a few questions, for example:

  • How old are you?
  • When are you planning to retire?
  • What type of investor are you (conservative versus aggressive)?

Robo Advisors use automation and software to create and manage your portfolio rather than using a financial expert.

While some robot advisors have minimum account requirements to get started, it is usually a low barrier to meet. For example, you may only need $ 500 to get started. Others do not have an account minimum, which means you can start investing with just a few extra dollars in your bank account.

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What is the difference between a robot advisor and a traditional broker?

A broker account is a place for you to manage your investments yourself. Robo Advisor lets a computer handle it for you based on your style and preferences. Most robot advisors usually charge a low, fixed fee, about 0.25% per year for your total investment. Online brokers tend to charge more or higher fees.

Robo advisors are good for practical investments. They use your preferences and style to choose how to invest your money and then manage it for you, and offer regular rebalancing as well. Sometimes as a self-directed investor through a broker, you may not prioritize this.

Robo advisors tend to invest in index funds and exchange traded funds to keep costs low. With brokers, you can invest in many different types of securities, but you have to pay a little more for the privilege.

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Advantages and disadvantages of robo-advisors

If you know that it is important to manage your money but are not sure where to start, a robo-advisor is a good introduction to investing. But they are not always the best choice for everyone.

advantages:

  • Immediate diversification. While brokerage accounts allow you to choose your own stocks and other securities, there is a chance that you can get too much of a good thing ̵
    1; which means you can also get a huge loss. Robo Advisors diversifies your portfolio through index funds and ETFs so that if you have a loss, it is not significant. Thanks to rebalancing, you also release investments that do not go well.
  • Minimum investment requirements. Depending on which robo-advisor you choose, you may not have an account minimum to get started. If you need something to get you started, it’s usually around $ 500 – sometimes less.
  • Low fees. Because robo-advisors use fewer people than brokers, they can charge lower fees.
  • Easy to use. Most robo-advisors have simple interfaces and apps to look at your investments and add funds.
  • Socially responsible investment. Some robo-advisors let you choose investments that adapt to your values ​​without charging a premium.

Cons:

  • Limited human interaction. While robo-advisors have solid customer service, you are limited in the help you receive. You do not always get the chance for expert advice. If a robo-advisor offers the chance to talk to a financial professional, it tends to incur an additional cost. Most robo-advisors are only online, which means you will not be able to visit a branch if you need to talk to someone about your account.
  • Get securities. If you want to broaden your investment choices, you may not have it with a robo-advisor. Most of them invest your money in ETFs, which is good for diversification. But if you are looking for different types of securities, you may want to look elsewhere.
  • Not good for everyone. Robo-advisor is a good choice for most people, but not always the right choice for everyone. Depending on your investment strategy, retirement plan, assets and where you want your money to go, it may not work for you.

Where to get started

As you browse through robot advisors to start investing, ask yourself a few questions before you decide.

  • What are the minimum requirements? Do you need to make a large contribution to get started or maintain a minimum account balance? The lower the threshold for qualifying, the easier it is to get started.
  • How are the fees? Some companies have a fixed annual fee, but do the math: a 0.25% fee looks very different for an investment of $ 10,000 compared to $ 100,000. Make sure you are okay with what you are forging over.
  • Do you have a chance to talk to a human? Many advisors choose portfolios based on answers from a fixed questionnaire, but other circumstances can affect how you invest your money. If you need to talk to someone about your unique situation, does your potential robo-advisor offer personal financial advice?

There is some leading robot advisors in the game, but not all of them have the same requirements and offers. Here are some.

  • Ellevest: No account at least; Monthly membership fees range from $ 1 to $ 9; specifically designed for women
  • Wealthfront: 500 minimum account accounts; 0.25% annual fee; good for most investors
  • Improvement: No account at least; 0.25% annual fee; opportunity for professional financial advice at an additional cost
  • Allied: $ 100 account minimum; no fees; good for current Ally customers
  • Acorn: no account minimum; $ 1- $ 3 per month to use; invest your reserve change

No matter which robo advisor you choose, it should be easy to get started and keep an investment portfolio. Just make sure you do your homework first to determine the fees you pay and find the best robot advisor to help you reach your investment goals.

Disclaimer: The information in this article, including program features, program fees and credits available through credit cards for such programs, is subject to change from time to time and is presented without warranty. When evaluating offers, check the credit card provider’s website and review its terms for the latest offers and information.

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