Have you ever downloaded a 99 cent app on your phone only to be bombarded by ads about buying the premium version which contains all of the things you actually wanted in the app? It drives me insane and I usually delete the app in total disgust. The polite term for this is “upsell”, the less polite term is “bait and switch”. Robo advising definitely has an upsell thing going on these days. There are many great features to their low cost services, but you have to be ready for the upsell. Let’s examine all of the pros and cons to Robo Advisors and see if they might be the best choice for you, despite the potential for being upsold.
Robo Advisor Definition
Robo Advisors are software platforms that automatically manage your money based on a few factors (usually age, income and when you need to use the money). They are an option between managing all of your investments yourself and hiring an advisor.
Robo Advisor Pros
This is the biggest pro to robo advisors. Most charge very low fees, from as low as 0.25% in some cases. These low fees mean more of the money you earn stays in your investment accounts.
Many financial advisors have asset minimums (I do not, for reference) meaning you have to have at least $250,000 of investable assets for them to work with you. Robo advisors often have no minimum or a minimum of $5,000. These low to no minimums mean a much wider group of people have access to investment help.
Ease of Use
Most of the platforms can get you up and running very quickly. You answer a few questions about your age, goals and how much you have to invest. The platform will then know which investment portfolio to put you in. Once you fund the accounts you are up and running.
Robo Advisor Cons
Based on your parameters you are put in a specific portfolio bucket that the platform has set up. It is hard, if not impossible, to make any changes to that pre-determined portfolio. If you have certain stocks you want to hold, or ones you want to avoid, that is very difficult in the typical robo advising platform.
My least favorite con. Often when you sign up for their advertised low cost investing options you will constantly receive emails and messages about their “additional services”. The typical offer is that for a higher fee you can work with a financial planner one-on-one, normally over the phone. This is fine if that’s what you want, but it can be annoying if you were just hoping for the low cost investment options you originally signed up for. As the fees go up you can often find a more comprehensive financial planner in your area to work with for the same cost, all without locking you into their specific portfolios.
Lack of Human Interaction
The majority of clients I work with want a second set of eyes on their financial life. Robo advisors can’t offer that, because they don’t offer a human to human relationships (unless you get upsold into their higher priced service levels…see above). If you want to sit with someone and discuss what you are doing now, and a variety of options of how to move forward, a robo advisor is not going to offer that type of service. They are also not going to look at your 401(k), your insurance, and your benefits from work all of which play a major role in your financial life.
If the pros outweigh the cons for you here are a few robo advisors to consider
Ellevest – specifically targeted at women investors. I love the mission of the company – to close the gender investment gap. They recently raised $34M from a variety of venture capital backers so they are well positioned to stay in business for the long haul.
Personal Capital – They offer excellent planning software to anyone – not just their investment customers. If you are not ready for a financial planner and want to try getting all of your information in a single place try their free software. Their fee analyzer is fantastic. Be warned that they will definitely upsell you often about why you should use their paid services.
Betterment – The original robo advisor. They are a solid company, with good financial backing. Their fees are low and their algorithms are based on Nobel-prize winning investment strategies.
Want a second set of eyes to look at your finances and point out anything you might be missing? Schedule a quick call to see if we might work well together.
Know someone who is trying figure out if they should go it alone for their investments or consider a robo advisor? Send these pros and cons their way.