The year 2020 was hard on many people but it also motivated thousands to seek alternative income sources. Investing and trading have become very popular with the younger generations, especially the millennials. Robo advisors, which are apps that help automate investments and help trading beginners, have gained millions of new users.
However, they also gained a lot of controversy on the account of whether these apps can be trusted. The tragedy surrounding the suicide of one of the popular robo advisor’s users was a very rude awakening for many people. If you think about investing through these platforms, you need to understand exactly what you are getting into.
What Are Robo Advisors and What Can They Do?
Robo advisors are online investment platforms that offer some help to beginner investors. In essence, these platforms are a hands-off method for investing. They offer you some information to educate yourself about trading and investment strategies. Then, they offer you some choices on what you can do with your money. The choices are limited and help define the strategy you wish to follow. Then, the platform essentially does the trading on your behalf.
Therefore, using robo advisors your personal involvement in trading is minimal. This means both lower and higher risk. On the one hand, you avoid making some big mistakes as a beginner. On the other hand, you are completely dependent on the platform.
The range of services offered by robo advisor platforms differs greatly. Some may offer only basic portfolio management while others can do almost everything including your tax optimization. The cost and fees will vary as well.
Bear in mind that investing through a robo advisor is always more expensive than doing it on your own through a regular online brokerage platform. However, considering the level of assistance you can get, this price might be worth it for beginner investors.
It’s also essential to understand that no matter how helpful they seem, robo advisors do not offer financial planning. Therefore, it’s completely up to you to manage your personal finances wisely. This means that if you aren’t confident in your ability to plan how to distribute your funds between different accounts, you might start with getting some financial counseling. This way, you’ll determine how much money you can afford to use to invest through robo advisors.
When Robo Advisors Are a Good Choice for You
Robo advisors might be a good option to use if:
- You are a complete beginner and don’t know much about investing yet. These platforms are a good way to build up your confidence and knowledge.
- The amount you plan to invest is rather small (under $25,000).
- You are looking for a hands-off investment method.
- You are just starting your investing career and don’t plan to do anything long-term yet.
In any and all of these situations, using a robo advisor is a great option. The cost of this service is definitely worth it for the value it offers.
However, remember the limitations of robo advisor services as well. If you have a big fortune to invest and you want to secure your finances for the long term, hiring a personal broker or financial advisor is safer. This will also be more expensive, so you need to be sure that the deal is worth it.
Things to Consider With a Robo Advisor Platform
If you think that using a robo advisor is right for you now, proceed with caution. A sudden increase in popularity resulted in the appearance of many new services. Therefore, you need to choose the one you can trust wisely.
- Choose what types of account you want the robo advisor to manage. These services can manage trusts, personal retirement accounts, taxable accounts, etc.
- Consider the portfolio recommendation choices offered by the platform. Make sure you retain the right to veto any of the automated choices that the advisor’s algorithm does for your account.
- Study investment selections used by the platform. Usually, robo advisors trade in ETFs and index funds. Bear in mind that you’ll pay transaction fees for trading these funds along with the robo advisor’s own fees.
- Study the full range of services offered by the platform. You need to pick something that will offer best value for your money. But only you can know which services you need exactly.
To sum it up, robo advisors can be a great help for beginner investors. Provided you keep in mind their limitations and manage your money wisely overall, using these platforms is worth it.
