Advantages and Disadvantages of Robo-Advisers
A growing trend in financial advising is the use of robo-advisers. Robo-advisers are supposed to be superior to their human counterparts, but are they really worth all the hype? Find out more as we examine the pros and cons of robo-advisers.
Advantages of Robo-Advisers
- Low Fees: The cost of robo-advisers can be significantly lower than a human adviser. This makes them more accessible for people who may not have as much money to pay higher fees. You can get started with Wealthfront for just $500 and another popular robo-adviser, Betterment, has no minimum amount to open an account.
- Accessible: Robo-advisers are easy to use. In most cases, they offer apps or web-based programs that provide clean, clear, easy-to-understand interfaces. So even if you’re not fluent in financial jargon, you are still able to follow what is happening in your account and invest when and where you want.
- Low Asset Requirements: Some firms and financial advisers only work with clients that have a set amount of principal. Robo-advisers have low, or no, minimum limits for their clients. For people that are new to investment, robo-advisers can be an entry point into long-term investing.
- No Human Bias or Emotion: When dealing with financial advisers, sometimes you just don’t seem to click. With robo-advisers, there is no personality to conflict with. This takes away any bias or emotional responses and keeps interactions limited to the cold, hard facts.
Disadvantages of Robo-Advisers
- Not Personalized: Robo-advisers provide no connection to who you are as an investor. Your investment advice and portfolio will be generic and not personalized to you.
- Information Restrictions: Robo-advisers work with the information you give them. It’s easy to calculate things like your annual income if you have one job, but what if you work freelance for multiple companies that have different payment scales depending on their needs and the hours you work? How do you track the daycare you run from your home for your neighborhood friends? What if some of your investments are in atypical markets that aren’t part of their survey? If you have complicated or nuanced personal finances, robo-advisers can have a difficult time processing that information. It may seem simple for other people to understand, but computers are limited by their coding.
- They’re Not Human: Algorithms are mathematically precise, as they treat everything as a data point that is statistically relevant, but they’re missing the motivation and purpose behind you and your investment. They can give advice, but you won’t get that personal touch that comes from having a face-to-face meeting with an investment adviser, like Fisher Investments, and having a live person getting to know and understand you. Small, simple things like offering a sympathetic ear or expressing empathy for your situation simply cannot be offered by a robo-adviser.
When it comes to picking your financial adviser, take a close look at what you want and need. Professional investment advisers might be the best fit for you, or maybe a robo-adviser like Acorns will fit the bill. It’s up to you to decide what is best for your needs.