People who want help managing their money can seek professional advice -- or turn to one of the increasingly popular robo advisers. Robo advisers offer automated, algorithm-based portfolio management and can handle tax-advantaged accounts, such as Individual Retirement Arrangements. The associated fees often are cheaper than those charged by professional financial advisers, but investors should carefully consider the pros and cons of using a robo adviser.
Pro: Low Minimum Account Balances.
Some investment advisers require clients keep a minimum amount of assets under management. Robo advisers may do the same, but there are several that set low, or no, minimum account balances, such as Charles Schwab Intelligent Portfolios ($5,000 minimum), Wealthfront ($500 minimum), and Betterment (no minimum).
Pro: Objective Guidance.
Some advisers make money by getting clients to invest in particular assets. With a robo adviser, investors know they are not being steered toward specific investments. Still, the robo advisers run by investment management companies, such as Vanguard and Charles Schwab, invest clients' money in their own funds. These companies earn money from managing the advisory service and from fees assessed on each investor's underlying assets.
Pro: Ongoing Management.
One reason people hire professionals to manage their finances is to get out from under the responsibility. "There are a few robo advisers that are ideal for the newbie who doesn't want to go through the task of learning about investing, diversification, and portfolio rebalancing," says Barbara Friedberg, a financial reporter and former university finance instructor. A robo adviser that automatically takes care of these details is a hands-off way to invest.
Pro: Better Performance.
Jason Hull, a certified financial planner and chief technology officer at MyFinancialAnswers, a financial planning software company, says robo advisers let people focus less on money and more on what's important to them, such as doing well at work, spending time with family, and having "life experiences." Hull points to reports cited in Barron's
that show passive investing outperforms active investing.
Pro: Lower Fees.
Many robo advisers assess fewer management fees than professional advisers. Charles Schwab Intelligent Portfolios, for example, charges nothing; Wealthfront is free for the first $10,000 to $15,000 managed; and Betterment starts at 0.35 percent and falls to 0.15 percent of managed assets when the account balance hits $100,000. Traditional advisers charge 0.5 to 1 percent of assets managed.
Pro: Tax-Loss Harvesting.
Some robo advisers offer a tax-loss harvesting service at no additional cost. The service sells assets that show losses, realizing (or "harvesting") the losses to offset gains from other assets. The proceeds are reinvested in other securities. This tactic reduces investors' tax liability.
Con: No Guarantees.
Financial experts caution that using a robo adviser doesn't guarantee a profit. "All investments go up and down in value," says Friedberg. "No adviser -- robo or flesh and blood -- will protect your investing dollars from market volatility."
Con: No Personal Advice.
When the market starts to drop and investors begin to worry, robo advisers may send out a reassuring template email. But having a human voice walk an investor through what's happening, and why it makes sense to stay invested or sell some assets, has value. Some people don't miss the human touch, but others are willing to pay the price for personal advice.
Con: Other Invisible Assets.
Robo advisers can customize investments based on investors' risk tolerance, which is judged by a short questionnaire. Most robo advisers, however, don't account for other investments or assets, such as real estate or pensions. Unless you rely on the same robo adviser for all assets, the allocation made by the robo adviser may be skewed.
Con: Average Advice.
Robo advisers offer advice for the average person. Teresa Mears of personal finance website Living on the Cheap notes that conventional wisdom calls for putting X percent in bonds rather than stocks once you reach a certain age, advice that surely doesn't apply to every last investor. People with a defined-benefit pension, for example, may not need as much invested in bonds because they can count on receiving a fixed amount of money in retirement.
Con: No Additional Advice.
Investment advisers may stick to recommending specific investments or portfolio moves, while financial planners
take a broader look at clients' short- and long-term goals. People seeking recommendations about paying for a home, college, or retirement will not get answers from a robo adviser.
Con: No Fund Choice.
With a robo adviser, investors can change their risk tolerance or goals, which will alter their investment mix. But they do not get to choose individual stocks or funds that they do, or do not, want to invest in.