This article was written by Colin Lalley of PolicyGenius.
The New Year is here, which means it's time to look at the year ahead. For a lot of people, that means tackling some big resolutions: losing weight, being more mindful, writing that young adult dystopian novel you've been sitting on since you saw The Hunger Games.
It also means deciding what you're going to do to maximize your money.
Even if you've maxed out your 401(k) and/or IRA, that doesn't mean you still can't put your money to work. Investing is a four-letter word to a lot of people who think they'll be instantly overwhelmed by hours of research. But robo-advisors like Betterment and Wealthfront have made investing easier than ever for everyone from novices to pros.
But are investment robo-advisors the right choice for you and your money in 2017? That depends on your individual situation, but it's important to know the pros and cons before you dive in.
The pros of robo-advisor investing
Robo-advisors are easy to use
Investing can seem like another language to a lot of people. That's why the ease of use through robo-advisors - competing with the best investors while not needing a degree in finance - is a huge appeal.
Robo-advisors are, for the most part, hands off. In just a few minutes, you can provide minimal information, start with little money (usually $500, or sometimes even an account balance of $0), and, for true novices, select from a few categories based on your investment goals. If you tell the robo-advisor platform what you're looking for, whether it's long-term retirement savings, a high-risk-high-reward investment, or a 529 college savings account, it'll pick the best investments for you and manage things mostly on its own. Algorithms, most popular in the mainstream when talking about your Facebook news feed, are now a great way to manage your money.
Robo-advisors simplify investing
Robo-advisors also tackle some of the more complicated aspects of investing. Most robo-advisors (and most investing in general) follow modern portfolio theory, which is essentially a way to balance risk tolerance with expected returns. If you're a particularly risk-averse investor, you may be nervous about which assets are best for you to put your money; these platforms can decide that for you, giving you some peace of mind.
Tax-loss harvesting and rebalancing, which can help minimize the taxes you owe and reinvest your money so you can make the most of it, are also handled automatically by robo-advisors. In actively-managed funds, these extra steps are usually reserved for the highest-value accounts. Since robo-advisors can automate these processes, they're making them available to the masses so everyone can feel like the Wolf of Wall Street (minus the yachts and comical amounts of cocaine).
Robo-advisors have relatively low fees
When you think of investing, you might think of Wall Street fat cats who charge fees that are so high they end up making more off of your money than you do. And that's not completely off base.
Actively-managed mutual funds can have a fee of 1% or more. That seems pretty low, but it can really eat into your returns. When you compare that to popular robo-advisors - Wealthfront manages your first $10,000 for free and charges a 0.25% fee a year after that, while Betterment has a tiered system that starts at 0.35% and goes all the way down to 0.15% - it becomes obvious where your money leaks are.
In this age of the Great Recession and Occupy Wall Street, it's not hard to see why robo-advisors have become so popular. With a low-cost alternative to fund managers, beginning investors now feel like they have the ability to manage their money without needing to give most of it away.
You can manage your investments in one place
It's (going to be) 2017. We're used to having accounts all over the internet. Facebook, Twitter, and Snapchat. Netflix, Hulu, and Amazon Prime. Spotify and Apple Music. That's why it's nice to know that with robo-advisors, you're able to keep a lot of your money goals in one place, online in a secure setting.
This isn't a benefit that's exclusive to robo-advisors, of course. A flesh and blood financial advisor can help with that, too. But robo-advisors can make it easy to manage every investment you need through their platforms, no matter your goal.
Want to save for retirement? You can do that. Looking for a shorter-term account, like saving for a big vacation or a down payment on a house? You can do that, too. Robo-advisors are even starting to branch out further; earlier this year, Wealthfront launched a 529 project that lets you save specifically for your child's college education.
If the goal of robo-advisors is to make investment easy, it doesn't do much if your investment options are limited. As these platforms continue to grow and evolve, you'll be able to better control how completely you manage your money in one place.
The cons of robo-advisor investing
Well, not exactly. While they're growing in popularity, robo-advisors still lack some crucial pieces that investors might be looking for.
No personalized advice
If you prefer your science-fiction like 2001, where robots are cold, heartless machines like HAL 9000, you might be wary of robo-advisors. And while robo-advisors won't start a machine uprising (at least not anytime soon), they don't do much for investors who want personalized advice.
Robo-advisors can be great at setting an investment foundation. But if you're risk averse, do you trust that a platform can get a full picture of what you want in a short questionnaire? What if you want a deeper dive into what is actually happening with your money, like the types of companies, funds, and assets you're investing in? What if you have questions about what effect recent world events will have on your money?
Robo-advisors still aren't great at giving truly personalized information. If you want someone to take a holistic view of your financial information, or even just to double check that you are understanding your finances correctly and making the ideal decisions to secure your future, find a financial advisor. Robo-advisors are for people who are more DIY about their money; if that's not you, you still have the option of sitting down with a human being - and should probably take it.
No support for complex financial plans
Robo-advisors aren't the best for complex financial plans, either. This builds off the point above: complex plans involve a lot of nuance and maybe even legal advice. Robo-advisors aren't necessarily part of that game yet. These platforms can make sure you invest your money in the correct broad categories, like deciding whether stocks or bonds are likely better for you, but they can't help you navigate the ins and outs of trusts or estate plans. For those, you're still better off seeing an actual person.
If you need to see a human advisor, use a service like GuideVine. This will allow you to see reviews of advisors, and can help you find the right person for simply discussing your money or giving you actual investment advice. While this might cost you a little more, with the right advisor you'll be paying for quality, tailored advice - not just someone who's looking to make a quick buck off of your money.
Overall, robo-advisors provide a good user experience - we're all used to slick apps and fancy interfaces, and these platforms make sure that they fit right in with your daily online browsing - and are great options for investors who are just starting out and want to dip their toes in the world of investments, or for people with a simple financial plan who just need an affordable, straightforward place to start their retirement plans. But for people who want a human touch for their investment, think about going with a real-life financial advisor who you can talk to about your money.
Whichever path you take, make sure you do tackle your investment plans in 2017. The sooner you get started planning for college, retirement, or any other financial milestone, the better off you'll be.
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