Over the last few years, there has been a growing trend of utilizing ‘robo-advisors’ in the industry. If you are unfamiliar with the concept, essentially there is very little to no human contact when handling your investments. Your investments are all completed online or on your mobile device, where you, as the client, answer questions and you are placed into a pre-built portfolio based on an algorithm. One of the main advantages of a robo-advisor is the lower fees associated with these accounts. Paying less is always great, but does that mean robo-advisors are right for your needs?
When it works
There is a subset of the population for whom investing with a robo-advisor works perfectly. If you fit into this population, take full advantage of the platform and start saving for the future. 100% fee-focused and want to pay less fees on your investments, this is a good option for you. Have a firm grasp on the general investing principles, the stock market and how investing works, this is a good option you. If you are just looking to get your “feet wet” and start looking at investing, this could also be right for you. There may be a few other situations where robo-advisors could be the right fit for you, but typically these subsets are the ones that benefit from robo-advisors the most.
When it does not work
There is a larger subset of the population where robo-advisors are likely not the right fit. For example, if you have a difficult time understanding investing or you don’t feel comfortable with investing, stick with an advisor. If you have complex plans, such as owning a business, retirement or being as tax-efficient as possible, working with an advisor is going be of greater benefit for you. Lastly, if you are looking for someone to provide help, guidance and a personal touch, do not go with a robo-advisor. There are numerous comments on Reddit that speak to outages, long wait times with different robo-advisor firms. Lastly, there is limited human contact, so you need to feel confident doing it 100% on your own.
Do the fees really matter?
Lastly, many of these robo-advisors market lower fees and saving you much more in retirement because you pay less. It is really hard to validate this, particularly when you can’t compare a robo-advisor’s portfolios to a financial advisor’s portfolio; it is like comparing apples to oranges. The thing to remember with financial advisors is that we work for you as the client and the fees you pay are for the service we provide. Similar to a furnace maintenance plan, you pay monthly instalments to get free annual service. If you didn’t pay for this, you wouldn’t get the free annual service. An advisor should be providing a service to you and supporting your needs. If your advisor is not doing this, maybe it’s time to look at your options and determine which one will provide a greater service then what you are currently getting.