The Pros and Cons of Investing with Robo-Advisors
Investing has traditionally been associated with high fees, long wait times, and complicated processes. However, with the rise of robo-advisors, these barriers have been lowered, allowing even the average investor to start investing with ease.¹ But what exactly are robo-advisors, and what are the potential risks and rewards of investing with them?
Robo-advisors are online investment platforms that use algorithms to automatically manage a client’s portfolio. These algorithms take into account the client’s investment goals, risk tolerance, and time horizon to create a customized investment portfolio that is typically made up of low-cost ETFs.²
One of the primary advantages of robo-advisors is their low fees. With robo-advisors, investors can access low-cost investment portfolios that are typically managed with fees ranging from 0.25% to 0.50%.³ This is significantly lower than the fees charged by traditional investment advisors, which can be as high as 1.5% of assets under management.⁴
Another advantage of robo-advisors is their ease of use. With robo-advisors, investors can start investing with just a few clicks and a minimum investment of just a few hundred dollars. This makes investing accessible to a wider audience, including younger investors who may not have large amounts of money to invest.⁵
However, there are also potential risks associated with investing with robo-advisors. One such risk is the potential lack of personalized attention. Because robo-advisors rely on algorithms to manage portfolios, investors may not have access to the personalized attention and expertise of a human investment advisor. This can be a disadvantage for investors who have complex financial needs or who require specialized investment advice.⁶
Another risk associated with robo-advisors is the potential for overreliance on technology. While algorithms are designed to create diversified portfolios based on a client’s investment goals and risk tolerance, they may not be able to react to market changes as quickly as a human investment advisor. This can lead to suboptimal performance during periods of market volatility.⁷
In conclusion, robo-advisors offer a low-cost, easy-to-use investment option for those looking to start investing. However, investors must be aware of the potential risks associated with investing solely through algorithms. It is important to weigh the advantages and disadvantages of robo-advisors before deciding if they are the right choice for your investment portfolio.⁸
Sources:
- Gauthier Vincent, “Robo-advisory: Definition, Use Cases, Market Landscape, and Startups,” Harvard Business Review, October 23, 2020.
- “Robo-advisers: A guide to who offers them and what they do,” MoneySavingExpert, updated January 25, 2022.
- Alistair Gray, “Robo-advisers set for shake-up as bigger banks join the fray,” Financial Times, August 1, 2018.
- “Robo-Advisors vs. Financial Advisors: Which Is Better for You?,” SmartAsset, updated October 22, 2021.
- Ben Hernandez, “Robo-Advisor Risks You Need to Know About,” Investopedia, updated July 20, 2021.
- “Robo-advisors: What Are They and How Do They Work?,” The Motley Fool, updated December 4, 2021.
- “Robo-advisors: What are the risks?,” Vanguard.
- “SEC Guidance on Robo-Advisers,” U.S. Securities and Exchange Commission, updated February 23, 2017.
