Millennials and younger people with smaller amount of money are torn between two options. Whether or not they should spend some money and hire a personal financial advisor? Or study something about financial markets and become a Do It Yourself (DIY) investor?
Nowadays, there’s a third and much better option available: using robo advisors. In fact, thousands of younger people with smaller amount of money to invest are using these robo advisors.
What’s a Robo Advisor?
Robo advisors are an online resource. They use complex computer algorithms and software to find your investment needs and provide solutions. You can avail a robo advisor from a financial services provider. Alternatively, there are excellent, independent robo advisors available for a small fee.
A robo advisor is useful to get advice about savings and investments. It helps you to develop and maintain a portfolio of savings and investment plans without much human interaction. However, the process isn’t fully automated: you need to provide various parameters such as amount of money, investment duration and other details.
Usually, a robo advisor will ask some questions about your investment needs. It processes your responses using complex algorithms and computer software. And it will provide solutions where you can invest money.
Robo Advisor v/s Personal Financial Planner
A robo advisor charges between 0.50 to 0.90 percent of your investment amount as fee.
They provide you a service but not financial planning and advice like a human financial advisor.
A personal financial advisor will charge between $100 and $300 per hour. A personal financial planner costs more if you retain on annual contract to manage your investments: between three and six percent of your total Assets under Management (AUM).
Yes, a robo advisor costs much lesser. That’s due to some limitations.
Robo advisors are basically an online resource: they won’t give you financial advice. A robo advisor is useful to get information on where to invest, schedule investments and manage a portfolio. It won’t do stock trading and other functions like a human financial advisor.
In stark contrast, personal financial advisors or personal financial planners will monitor your investments. They’ll alert you if an investment can drop or gain and help minimize losses and increase profits.
You might now wonder, why go for a robo advisor?
There are several advantages you get by using a robo advisor. And robo advisors can also help you get rich. Here’s how.
Step-1: Write Your Financial Goals
A robo advisor will only provide solutions that match your queries. It works by asking you certain questions. Your responses undergo complex processing with algorithms and software. There’s no personal touch.
Therefore, writing your financial goals is the first step. When a robo advisor asks questions, provide responses that match your written financial goals. This would help the robo advisor to better use its algorithms and software to come up with solutions.
Step-2: Get the Best Robo Advisor
Let’s assume you’re about to begin your investment journey. Obviously, you wouldn’t have loads of money to invest.
Some robo advisors enable you to start investing with just $100.
That’s where a robo advisor comes in.
First you need to decide on what type of robo advisor you wish to avail.
There’s two types of robo advisors, as I mention earlier on. We have robo advisors that banks and investment companies offer for clients. There are excellent robo advisors from banks and financial organizations that you can get for a reasonable fee.
And there are excellent robo advisors that are independent of banks and financial service companies and allow you to invest almost everywhere.
Usually, robo advisors from banks and financial organizations will provide solutions available with their parent company and its partners. This might prove a limitation if you wish to spread your investments around.
There are robo advisors that come with special offers such as zero commissions on first five investments, cashbacks, high returns on specific products and so on.
Step-3: Select the Right Solutions
A robo advisor will only provide you one or more detailed investment plans. This means, it will provide solutions where your money would fetch best returns.
Consider which investment plan is best for your needs and amount of money you have. And how much you wish to continue investing in future.
Once done, you can set automatic payments for these investment plans. Robo advisors can also be set to pay a specific amount of money into a plan on a particular date. You’ll need to configure a robo advisor to do so.
Step-4: Automate Your Investments
That’s what robo advisors are supposed to do. Therefore, you can also use a robo advisor to manage a 401(k) account and other contributions. However, keep tabs on how much commissions a robo advisor will charge for these services.
Automating your investments means saving more. You can also step up savings and investments at regular intervals with a robo advisor.
The best solutions that would usually be available from robo advisors will consist of Exchange Traded Funds (ETFs), Mutual Funds, retirement plans, home mortgage and term deposits.
Automating investments and stepping up gradually means you’ll have a large amount of money kept aside and growing.
A robo advisor is also useful for rebalancing your investment portfolio when necessary. You can cease, increase or decrease investments in a particular plan and opt for another.
Step-5: Using Financial Advisor & Robo Advisor
This means you would spend more on investing. You’ll be paying for a personal financial advisor as well as the fees to maintain a robo advisor. However, this strategy can prove useful in some cases.
While simpler investments that are relatively safe can be left to a robo advisor, you can use a personal financial advisor, especially from a bank or financial organization, for more complex investments, advice and other tasks that require human intelligence.
A robo advisor opens your door to riches. It helps you secure retirement while investing money in relatively safer options. They cost relatively lower than personal financial advisors.
However, a robo advisor can never fulfil all functions of a human, personal financial advisor. Hence, it’s best to use a robo advisor only when starting your investment journey. Later, switch to a good financial advisor.
Such a strategy would definitely prove very profitable in the longer run, as your wealth grows. There are debates on both sides whether to opt for a robo advisor provided by banks and financial institutions or opt for those available in the market and operate independent of any organization.
The choice is yours. Take a decision according to your needs. Also check out special features and savings, commissions, fees and other charges while finalizing on a robo advisor.
Pritam Nagrale, a digital marketer and Generative AI enthusiast, embarked on his journey with affiliate marketing in 2004. With over 14 years of blogging, he has turned his passion into a fortune, profoundly impacting the digital landscape. Through his expertise, Pritam has guided thousands to monetize online and achieve their dreams, establishing himself as a beacon for aspiring digital entrepreneurs.