The idea behind robo investing is to automate investment decisions. That way, you do not have to go through the work of researching and choosing individual equities. It’s all handled for you through a computerized process.
The first brokerages to offer robo investing services were Betterment and Wealthfront. They began offering services to consumers in 2008. The idea was that a consumer could set aside the same amount of money each month and the robo advisor would take that money and invest it. ETFs are usually used, dividing money between stock and bond funds.
Many robo advisors subscribe to the principles of modern portfolio theory (MPT). This states that asset allocation is more important than the individual investments or securities are chosen for a portfolio. However, there are some different strategies robo advisors use to tweak results. This is based on different characteristics that an investor might have.
Depending on the robo advisor, it might be possible to get an optimised portfolio, with assets aimed at specific goals. Some advisors offer socially responsible options and others offer access to Halal investing. An optimised portfolio can be one way to adhere to certain principles to grow wealth.
Some robo investing providers offer tax-loss harvesting in the U.S. This strategy focuses on tax efficiency. Some robo advisors manage which types of accounts the assets go into to take advantage of tax benefits.
With passive indexing, robo advisors create a portfolio using index ETFs. These index ETFs are passively managed, based on specific indexes, such as the S&P 500, Russell 2000, Dow Jones Index or even a bond index ETF. Index ETFs can be geographically diverse as well, including emerging market bond securities or an all-world stock index.
Index ETFs are often very cost-efficient. Instead of a portfolio manager deciding what assets are included, an index ETF instead relies on what is tracked by the underlying index.
Depending on the robo advisor, it might be possible to get an optimised portfolio, with assets aimed at specific goals. For example, some advisors offer socially responsible options and others offer access to Halal investing. If you want to meet specific goals and support certain principles, an optimised portfolio can be one way to go.
In the United States, some robo investing providers offer tax-loss harvesting, which can help you reduce your overall tax liability. This strategy involves making sure that, when you sell assets, those that have the best tax efficiency are taken care of. Additionally, some robo advisors manage which types of accounts the assets go into in order to take advantage of tax benefits.
Another strategy robo advisors use is automatic rebalancing. When you open a robo investing account, you usually choose an asset allocation that fits your strategy. If you don’t choose your own allocation, the robo advisor might choose one for you, based on your risk profile and timeline.
As you approach a goal, like retirement, the robo advisor will automatically shift some of your assets. It might sell some stocks and use the proceeds to buy bonds. Additionally, if your asset allocation strays beyond a certain percentage, such as 5%, the robo advisor might automatically rebalance to bring your portfolio in line.
There are some good reasons that some investors are attracted to robo investing. Robo investing offers the opportunity to learn about investing while taking advantage of low fees.
In general, robo advisors charge relatively low management fees. It’s fairly common for more traditional wealth advisors to charge at least 1% of the assets under management. However, many robo advisors charge less. In Europe, it is possible to find fees at around 0.8% of invested capital, while U.S.-based robo advisors often charge 0.4% or less.
There are still expense ratios associated with the index ETFs, but index ETFs usually have much lower fees than their actively-managed counterparts. In fact, passively-managed fund fees are right around 0.12%, while actively-managed funds are closer to 0.62%.
Between the lower management fees and lower expense ratios on the EFTs used to construct investor portfolios, it is possible to keep more of those investment gains. Fees represent lower real returns. Therefore being able to get portfolio management help from an algorithm and keep more of your gains is a major attraction of robo investing.
Another reason robo investing can be attractive — especially to beginning investors — is the fact that there’s no necessary learning curve. If you plan to invest in individual equities or engage in active trading, it’s important to learn a number of concepts and strategies. This can feel overwhelming. Plus, while you are learning, you are not investing and missing out on opportunities for portfolio growth.
With robo investing, you can set money aside regularly and someone else does the heavy lifting. It’s a way to get started and make sure your money is working for you while you learn about other investing concepts. You can begin investing without a steep learning curve and then when you have more knowledge, you can try other methods.
Additionally, many robo advisors also offer newsletters. These can give you insights into how the market works. This can help you learn and prepare without the opportunity cost that comes when your money isn’t invested.
Less knowledge is required to robo invest – You don’t need as much knowledge when you robo invest. Instead, you send your money and the algorithm takes care of it. When investing your own money, you need to research and learn about different strategies and concepts first.
Low fees – Depending on the situation, you might have lower fees when you use robo investing. Some brokerages and self-directed accounts have higher annual fees. You might also have to pay transaction fees.
Time-tested portfolio theory – MPT is a Nobel-winning concept and many robo-advisors incorporate elements of it into their approach. With robo investing, you get access to that.
Set it and forget it approach – With robo investing, the assumption is that you will leave the money in your portfolio and it will grow over time. You can continue to use dollar-cost averaging and just forget about the need to check your portfolio every day.
Access to human advice if needed – Depending on the robo advisor service, you might be able to get some human interaction and help if needed. Some robo advisors can help you create plans for specific goals.
Not completely personalized – Even though robo advisors do tailor portfolios based on algorithmic representations of your risk profile and timeline, they are not completely personalized. You can create your own investing plan when you invest your own money.
Limited investment choices – With a robo advisor, you won’t have as many choices. When you invest your own money, you can choose individual equities, options, and other assets that might provide you with the potential for higher returns.
Less control – You also have less control over your portfolio when you use robo investing. By investing your own money, you have complete control.
Robo investing relies heavily on index ETFs. These are broad-based ETFs that have specific characteristics. As long as a security is listed on the index, the ETF includes it. On the other hand, actively managed funds are comprised of assets chosen by a human manager. As a result, they are more likely to actually underperform the related benchmark index.
Additionally, passive funds, like index ETFs, often have much lower costs than actively managed funds. As a result, you might see better overall returns and results with robo investing than you would with active management by a human.
Getting started with robo investing is fairly straightforward. There are many robo investing providers in Europe and in the U.S. Here are some of the more well-known and popular robo advisors.
One of the most-downloaded robo investing apps in Europe, ETFmatic has been around since 2014. In addition to a free simulation account, this app offers simplicity and an intuitive experience. Additionally, there is a high degree of fee transparency with EFTmatic.
Even though ETFmatic has a number of good features, it also has a high minimum. You must have 1,000 in whatever currency you’re working with — euro, pound, or dollar.
Based in Germany, it’s possible to get started investing with as little as 100 euros with easyfolio. You can choose from three different simple asset allocations, based on your goals. There’s a portfolio for stability, one that focuses on a defensive strategy, as well as one aimed at growth and that is a little more aggressive.
While the cost is low, easyfolio is available in Germany, but not in the U.S. or U.K. It’s not widely available.
Even though Indexa Capital is based in Spain, it’s available to European investors, except those located in Malta and Cyprus. Indexa Capital features low costs and good transparency. Indexa has been around since 2015 and offers the ability to set up automatic investing and take advantage of index funds with a low minimum.
The largest digital wealth manager in the U.K., Nutmeg makes it easy to engage in robo investing. The platform includes access to personal pension accounts, stocks and share ISA, Lifetime ISA, and Junior ISA, on top of a general investment account. You can choose a style that works for you and a portfolio will be managed on your behalf.
Fees are a little higher for accounts with smaller balances, but they are in range to be competitive with others.
The OG robo advisor, Betterment offers a straightforward and approach to robo investing in the U.S. Betterment offers different accounts for various goals, including an IRA account as well as a taxable investment account. The company also offers banking products, including high-yield savings and a checking product accessed by debit card.
Betterment fees can be a little steep once your account balance reaches $100,000. Additionally, there’s an additional fee for services related to speaking with an advisor.
This is another legacy robo investing provider. Wealthfront provides robust guidance for different goals, including saving for college and buying a first home. On top of that, Wealthfront is one of the only robo advisors in the U.S. that offers a 529 investment account option for tax-advantaged college savings in addition to an IRA.
Wealthfront has a higher minimum than similar U.S.-based robo advisors, though, requiring at least $500 to open an account, while many others have no minimum requirement.
In addition to providing a way to set up regular recurring investments, Acorns allows you to “round up” your transactions in connected accounts to invest with pocket change. Acorns offers a taxable account, as well as IRA and SEP IRA choices. It’s also possible to open a custodial account for your kids.
Acorns uses a flat monthly subscription model. As a result, the annual fee (as a percentage of invested capital) can appear high when you have a low balance.
Because of its relative ease when it comes to getting started, robo investing can be attractive to new and inexperienced investors.
Many robo investing providers have advisory boards that include professional investors. Additionally, the strategies used are time-tested. As a result, it’s possible to make investing easy by outsourcing the heavy lifting to a low-cost professional service.
Rather than spending hours researching different investment choices and building a portfolio, robo investing allows for spending less time. All you have to do is spend a few minutes setting up a profile that can be used to assess your risk tolerance.
After that’s done, it’s simply a matter of sending money to the investment account each month and having someone else take care of the details. In fact, after setting up the account and asset allocation, you don’t have to spend any time thinking about it afterward.
Most robo investing strategies use index ETFs which offer instant diversification. You get automatic portfolio diversity across sectors, asset classes, and geography without having to manage it on your own.
On top of that, if your diversification gets out of balance, many robo advisors automatically rebalance your portfolio to reflect your goals and risk tolerance.
As with any investment, there are some risks with robo investing. Here are some items to be aware of.
Even though an algorithm handles most of the investing, humans are still involved to some degree. The strategies and questionnaires set up are susceptible to human mistakes.
Any investment comes with the risk of loss. Even though robo advisors rely heavily on index products, they can still lose value, putting your capital at risk. Additionally, you aren’t likely to beat the market by a large margin, even if you don’t lose money. Because index products closely mirror different aspects of the market, you likely won’t beat the market, although tracking the market is likely to result in overall success in meeting your goals.
Even though robo investing can be attractive, it’s also important to note that there are criticisms of robo investing as you make your decision about how to grow your wealth over time.
If there is a market correction and you need reassurance, you might not get personal attention and context for the market. Additionally, you don’t have access to personalized investment advice and ideas.
Many robo advisors use index ETFs, so basically it’s copying aspects of the market. However, on top of the expense ratio, you will pay a management fee. You could potentially choose broad-based index ETFs on your own.
As long as you choose a brokerage that doesn’t charge transaction fees for buying ETFs, you might be able to see lower costs. However, you won’t have access to features like tax-loss harvesting or rebalancing if you invest on your own.
Finally, with a robo advisor, you have access to fewer investment choices. Most robo investing providers only offer access to stock and bond ETFs, and occasional REITs.
You won’t be able to invest in individual equities and bonds, options, or cryptocurrencies. You also have less control over your portfolio allocation, outside of asking for tweaks to your asset allocation.
Consider your goals and portfolio strategy when choosing a robo advisor. Don’t forget to take a few other steps, too.
Even if the website looks great, check into the portfolios to see what’s available. Find out what index ETFs the provider uses. Then check the assets held in those ETFs. Also, check into the advisory board to see what credentials the team has to direct portfolio strategy.
Review the fee structure for the robo advisor. Depending on the services you use and the expense ratios involved, some providers can be as expensive as mutual funds. Make sure to run the numbers to ensure that you’re getting good value for what you’re paying.
Check to see how the robo advisor handles market downturns. Because of the focus on index products, you’re not likely to see positive performance during a crash. However, you can see whether they offer a level of support during a downturn.
Robo investing can be a good choice for those who don’t want to worry about research. There’s no worry about losses due to day trading or news trading. Rather than managing a portfolio, someone else does the heavy lifting. With robo investing, it’s possible to set aside the same amount of money each week or month and have it automatically invested in a diversified portfolio that reflects your risk profile.
Yes, as with any investment you make, it’s possible to lose money. Market forces can result in a downturn or losses. However, because many robo advisors rely on broad-based index products, you portfolio is likely to recover along with market. However, you can’t pull your money out while the market is down if you want gains over time.
Most robo advisors are as safe as any other brokerage. They register with government regulators. Additionally, many robo advisors in the United States have SIPC insurance to protect against brokerage failures.
A robo advisor invests your money on your behalf, creating and managing a portfolio for you you using the help of algorithms.