Many 401(k) management companies offer free financial advice or portfolio management. But many of these options might not be as impressive as they appear at first blush. While some companies do have a human monitoring your portfolio, others offer only robo advisors. The “financial advice” you were promised turns out to be an algorithm!
Sometimes, a robo advisor is all you need. But it’s important to remember it’s not Commander Data or C-3PO on the other end of your web connection. Robo advisors don’t have superhuman intelligence or the ability to have a real conversation with you. Instead, they’re a service that handles some basic portfolio managing tasks, often for free with your 401(k).
What are robo advisors?
A robo advisor is an automated service that uses algorithms to determine how to distribute your investments. When you sign up for a robo advisor service, you answer some general questions to guide the algorithm—for example, whether you want a low-risk or high-risk portfolio.
One significant advantage of robo advisors is accessibility. You can work with them anytime, anywhere, as long as you have an internet connection. Robo advisors can work for you if you live in a remote area, if you want to avoid public places due to Covid-19 concerns, or if you just don’t want to put on real pants! That said, human financial advisors work by phone or video call more often today as well.
Another advantage of robo advisors is their low cost. They generally charge between 0.25 and 0.5 percent of the amount managed per year and many do not have an account minimum. By contrast, a human financial advisor might charge 1% of the account managed per year and have an account minimum in the tens of thousands of dollars.
You aren’t limited to these two ends of the spectrum, however. Many robo advisor services offer the opportunity to chat with a human advisor, while many traditional financial management companies are beginning to provide online planning services. Whatever your preference and budget, there’s probably a service out there that will work for you.
Pros and cons
Robo advisors don’t just indiscriminately invest your money for you. Many will automatically balance your portfolio—a tedious but important task. Some offer tax-loss harvesting and other strategies to minimize your tax obligations. The app you use might offer tools for tracking your spending habits or calculating a savings trajectory.
However, robo advisors can’t do everything a human can do. Although they offer a certain degree of portfolio diversification, they’re pretty much limited to exchange traded funds (ETFs). A human advisor, on the other hand, can help you invest in currencies, real estate, or whatever else your heart desires.
A robo advisor might seem inherently more objective than a human. However, humans decide what underlying principles a program uses to determine what is a good or bad investment. These assumptions might not line up with your goals.
Perhaps most importantly, robo advisors can’t look over your whole financial situation and make a comprehensive plan based on your individual needs and long-term goals. A robo advisor can take care of your stocks for you, but it’s not going to advise you on how to juggle planning for retirement with saving for your child’s college tuition. You will need to have your objectives already clear when you sign up in order to tell the robo advisor whether you want high or low risk, short or long term payoffs, and so on.
How to choose a robo advisor
If you decide to work with an online investing platform, the number of options is growing all the time. You can work with an established name like Charles Schwab or Vanguard. Alternatively, you could go for a newer, up-and-coming company like Betterment or Wealthfront.
One of the first things to consider is whether the robo advisor service has a minimum balance and if so how much. You should also take into account the fee structure, both up-front fees and ongoing charges.
Cost isn’t the only factor, however. Make sure to familiarize yourself with the different services offered at various price points. Maybe you want to pay a little extra to have the option of chatting with a live human from time to time.
Also consider what types of accounts the robo advisor manages and what options there are for investments. For example, only a few services offer 401(k) management. Or maybe you want to tailor your investments to avoid companies with poor records on human rights or environmental issues.
Find advice that’s right for you
Investing avenues are evolving all the time and are more accessible now than ever. But if you need someone to help you decide what your investing strategy should be or help you make a plan to meet financial goals, you need a human being. To find a genuine, Turing-tested human, contact us to be matched with a financial advisor.