Six Basics to Consider Before Investing with a Robo Advisor

You're looking to grow your money, but you're not quite sure how to get started. You've considered hiring a qualified professional to work with you on all financial matters including your investments, but you're worried the fees might be too steep for your budget. You've thought about meeting with potential financial advisors, but you don't have the time to interview them.

Should you go robo?

Robo advisor, that is. A robo advisor is a digital investment management service that allows you to input your funds, financial data and investment preferences online and designs algorithm-based recommendations based on your responses.

Robo advisors can offer advantages, like low fees and easy setup. While a human advisor may charge one percent or more of your invested assets to help you manage your money, robo advisors typically charge only a fraction of that amount in management fees. Some allow you to open an account with only a few dollars, and others don't even require a minimum deposit to open an account. Many providers are geared towards smaller-scale investors, limiting investment choices to low-cost exchange-traded funds or other lower-fee investment options.

Beyond the attractions of low fees and simple online access, robo advisors also offer efficiency and accuracy. Robo advisors gather client data to create complex algorithms. Using these algorithms, robo advisors are able to offer customized advice for money management, like mapping out financial goals or recommending asset allocations. They can also highlight relevant research and knowledge for their investors, as well as offering real-time recommendations based on each individual's investment history and preferences.

According to a 2015 Deloitte study, though robo advisors still manage less than 0.1% of all US investment assets, they're growing in popularity. Consulting firm A.T. Kearney projects that the assets managed by robo advisers will increase by 68% annually to $2.2 trillion by 2020. Major investment firms have entered the growing robo advisor market with their own computerized services. As new advisor options emerge and evolve quickly, it's a good idea to consider all options carefully. Examine the services industry experts provide to know what you should look for in an advisor.

Here are some considerations to factor into your research on robo advisors as you evaluate whether they are right for your needs.

1. Reasonable management fees and small initial investments. Robo funds often have preset investment choices based on client questionnaires about risk tolerance and investment goals, and they typically charge lower fees than human advisors. Human advisors may charge upwards of one percent of all the money you have in your account, while robo advisor pricing options are typically a fraction of that.

2. The best robo advisor sites are streamlined and simple. Good robo advisor sites provide clearly organized, straightforward advice. For example, one of the leading robo advisor sites makes sure you have an emergency fund in place before you start selecting investments. That's the kind of good financial practice you should look for in an advisor, robo or not.

3. Federal regulators are still evaluating robo advisors. The Securities and Exchange Commission has its own recommendations for investing with robo advisors, but the most important unanswered question is whether robo advisors (and the companies that own them) really exercise fiduciary responsibility by truly putting the needs of the investor first. It's essential to understand the risks involved with entrusting your investments to the robo advisor market, where restrictions and consequences are still not completely clear.

4. As major investment firms and even banks enter the market, it's likely that more diverse options in advisory services and pricing will emerge. As big investment names are starting to offer their own robo advisor options for small investors, different robo advisor providers will likely start to differentiate their marketing, services, and fees. It's always smart to shop around for the best deals and fit for you.

5. Robo advisors are no substitute for a basic personal finance education. It's easy to sign up for a robo fund or even find a fee-only financial planner, but it's still important to cultivate your own financial knowledge. Consider public resources on basic financial topics, the range of money management resources offered on Practical Money Skills for Life, or workshops at your community college or public library. Self-education is the most powerful tool for any endeavor, but it's especially essential to handling your finances.

6. Robo advisors aren't capable of providing truly personalized investment advice. An algorithm can't ask countless questions about your long-time financial goals and values or answer all of your queries during a major market change. Though robo advisors provide a low-cost way to get started in investing, you won't have someone who can give you personal advice when unexpected situations arise. Before you sign up, take some time to consider how much personal assistance you think you'll need.

Bottom line: In 2013, a Gallup poll reported that only one-third of Americans keep a budget or have a long-term financial plan. For some, a robo advisor may be a simple step in the right direction. For others it might be a human advisor or blended service that provides both robo and human interaction. But before you entrust your money to any financial service, fully research it and make sure that it's the right choice for you and your financial goals.

Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter:

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.