In the past few years, robo advisors have become increasingly popular with many investors around the world. A robo advisor an online investment program that uses algorithms to choose the best investments for your portfolio. This selection is done based on your investment goals that are submitted via a detailed questionnaire. Robo advisors are especially useful for people that cannot or don’t want to hire financial advisors. There are many reasons to invest with a robo advisor but like any investment there’s a possibility you could lose the money you put in too.
Here is why you should consider investing with a robo advisor:
1. Low fees
This is especially vital for people that have limited funds or those venturing into investing for the first time. Robo advisor fees are much lower than those charged by human financial advisors. The best robo advisors charge a fee based on the value of your portfolio. This fee ranges from about 0.7%-1% in the United Kingdom, 0.4%-0.6% in Canada and even less in the United States. Financial advisors charge between 1% and 2%. Management fees are very crucial when it comes to the return on investment of your portfolio. An annual fee of 2% can reduce a 6% total return into a 4% net return. This ends up having a great impact on your portfolio over several years.
2. Regular rebalancing
Portfolios might occasionally get out of balance, even those that have been well allocated. Higher or lower changes in asset categories can significantly distort your allocation. As a result, your portfolio needs to be rebalanced as often as possible. Markets can experience major shifts in a matter of months or weeks. Rebalancing is very complex, especially if your portfolio is very well diversified. In addition, a transaction fee is usually charged to make alterations in individual securities. The good news is that robo advisors will automatically rebalance your portfolio on a regular basis, without the need to pay any additional management fees.
3. Tax efficiency
Every experienced investor is aware of the impact taxes can have on the rate of return. This is especially true of short-term capital gains. Robo advisors invest through index based Electronic Funds Transfers (EFTs), thus minimizing capital gains taxes. Since trading within such funds occurs rarely, these EFTs generate very low capital gains. Some robo advisors in Canada and the United States even come with a tax loss harvesting ability. This is a strategy where capital gains are offset through other loss-making investments.
4. Low minimum investment needed
Human financial advisors often require a minimum investment of several thousand dollars. This is a hindrance to beginners that don’t have much money to invest immediately. With robo advisors, you can start investing right away with as little as $1. If you have a habit of saving money regularly, your portfolio can grow significantly over time.
5. Hands-off investing
Hands-off investing provides a sense of freedom, especially for new investors. Since the portfolio is created using an online algorithm, investors don’t have to make decisions based on their emotions. Individual accounts can be created within minutes and recurring contributions made automatically. Finally, hands-off investing means people can trade anonymously without the involvement of another human
6. 24-7 access
Unlike human financial advisors, robo advisors are available 7 days a week, 24 hours a day. This means investors can access the platform at anytime of the day from any geographical location. These advisors come with automated tools which reduce the poor judgment, human error and behavioral biases that may arise when advice is offered by a human. Robo advisors allow investors can make decisions make decisions more objectively and freely without feeling pressured.
There are many reasons to invest with a robo advisor including tax efficiency, rebalancing, and low fees. The ideal robo advisor is one that is able to fulfil your specific investment goals and needs.