Robo-advisors are the latest talk of the town in the investment world. For a novice, this conversation would sound like some science fiction story that is unlikely to happen anytime soon. WealthSimple Vs Questrade sounds more like Alien vs. Predator than an actual 21st-century investor dilemma.
One thing is certain: robo-advisors are here to stay. Humans: you better move out of the way and make way for them!
Individually-tailored investment portfolios are for anyone who wants to be the master of their own destiny — and by destiny, we mean their own investment objectives, return expectations, and risk tolerance, in an affordable way.
In the end, people want low fees and high investment returns — and this is where robo-advisors come in.
What are Robo-advisors?
Robo-advisors are automated platforms that manage the construction and maintenance of investment portfolios. All you have to do is open an account, give details about your risk tolerance and goals, and then the platform will invest the amount of money you desire into a pre-constructed portfolio; usually a bundle of low-cost exchange-traded funds (ETFs).
This concept is very similar to the idea that started other all-in-one funds such as target-date retirement funds. The objective is to tend to all your investment needs in both cases. However, the difference is that robo-advisors can provide more guidance and a better user interface. Instead of having to evaluate all the available target date retirement funds and choose one, you can just sign up with a robo-advisor and all the choices will be made for you.
Robo-advisors are designed specifically to maintain your investment portfolio. Nevertheless, humans are still in charge, as they construct the portfolios, choose the underlying funds and program the decisions robo-advisors make.
Advantages of Using Robo-advisors
Lower maintenance fees. Robo-advisors give users access to financial planning and management at a much lower rate than banks. Usually, wealth management is quite expensive, and most independent financial advisors work with clients whose numbers exceed six figures. Mutual funds purchased through banks certainly charge maintenance fees of at least 2.35% per year. In contrast, robo-advisors have annual fees between 0.35% to 0.70%, a notable difference. As a result, clients can save up to 2% in annual fees. Due to these low fees and passive investment strategies used by these platforms, you could end up earning more returns over time.
Affordable, high-quality portfolios. According to available research, a low-cost index funds portfolio has an 80% to 90% chance of surpassing anything else. And the best part about robo-advisors is that they take this to their metal heart. Almost all robo-advisors create their portfolios based on low-cost index ETFs. When you use these platforms, you’ll certainly get the best possible portfolio that sticks to the most accurate research available on how to invest well. Although it does not provide any guarantees, it is a great start.
Ease of Use. Another great thing about robo-advisors is that they tend to simplify things a lot. Opening an account, answering some questions about risk tolerance and goals, setting up ongoing contributions will easily place you in the portfolio that best matches your specific investment needs.
Tax efficiency. Many robo-advisors offer services that can increase after-tax return for those investing within a taxable account. Most even have an integrated tax-loss harvesting method, which automatically identifies temporary market losses to offset gains, preventing certain loses. Some robo-advisors even offer automated asset location, which can greatly boost after-tax returns. Nevertheless, all these great features won’t be able to help investments held within IRAs, 401(k)s, and other retirement accounts. But they can be useful to those who are using a taxable account.
A Final Note
Robo-advisors may not be the only way to save on fees; especially if you’re comfortable buying your own ETFs through a discount brokerage account. Even so, few people feel comfortable enough to manage their investment portfolios by themselves. Frankly, there are disciplined people who who have a hard time controlling their behavioral biases. Furthermore, you will have to rebalance your portfolio at least once per year, if not more often. For many people, when it comes to money management, robo-advisors are a logical bridge between professional services and DIY investing.
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