5 Things to Ask Before Considering a Robo-Advisor

Robo Advisor

With the vast increases in technology occurring over the last few years, it should come as no surprise that investing is finding a home on the internet.

Robo advisors are increasingly popular, and offer some obvious benefits over traditional financial planners.  Some of these benefits include lower initial investments, 24/7 access to your portfolio, smaller asset management fees, and the benefit of algorithms designed to make smart investing choices based on your unique situation.

As with anything related to personal finance, of course, you should go into an investment plan with your eyes open. Before you consider using a robo advisor over a financial planner, be prepared to ask the following five questions.

Are robo-advisors safe and secure?

If you are worried about your money being stolen, you can relax: trustworthy robo advising platforms take care to have security systems in place to prevent hacking. In fact, some robo advisors have multiple ways to protect your assets: browser encryption, session timeouts, and rigorous log in procedures keep your account safe, while insurance protects your investments from fraud.

You should be able to find this information somewhere on the robo-advisor’s site. Most robo-advisors are diligent in explaining about their safety and security.

Additionally, your robo-advisor should be upfront about what will happen in case the company is bought out.

What sort of support will I have if something goes wrong?

Just because robo-advisors aren’t human doesn’t mean that there isn’t ample support for users. In addition to self-help FAQs and guidelines, there should always be a human component to a robo-advisor, whether it is just a customer service representative, or someone who is more hands-on in the startup process.

Do your research before choosing a robo advising platform. Some startup companies do not offer any technical help outside of business hours. Other robo advisors, usually ones backed by larger, already-established companies, may offer nearly 24/7 support. Ask yourself which company you feel more comfortable with, and trust your research.

Do I need advanced technological knowledge to use a robo-advisor?

Definitely not! The algorithms robo advisors use to choose investments for you are pre-designed. All you need to do is answer some questions, and the robo advisor should take over. All of the techy things should be handled behind the scenes, where you don’t even see them.

Most robo advising platforms pride themselves on being an easy, accessible way for everyone to invest. After all, that is the biggest selling point for robo-advisors, and is how they gained popularity. The only thing you would need to consider, then, would be how much availability you need in terms of customer service in case you run into any problems.

Do I need extremely personalized advice?

Robo advisors are pretty good at providing personalized advice. When you sign up, your robo-advisor will ask you for details about yourself. They may ask about your goals, your comfort with risk and your investing style.  Each of your responses factors into the portfolio the robo-advisor designs. For women, there are several robo-advisors created just for you.

However, in most cases, robo-advisors lack the human touch. Your portfolio will be personalized according to pre-designed algorithms, so the robo advisor will not be able to improvise. A prime example of this would be if you announced to your financial planner that you are expecting a new grandchild, or that a family member had become ill. A human financial planner may have just heard of a new college savings plan, or may see an opportunity in the market for a low-risk investment while you care for your loved one’s illness. A robo-advisor can account for these events, but only if it is programmed to do so.

There ae some robo-advisors that also offer access to Human Advisors such as Personal Capital, RebalanceIRA, Vanguard Personal Advisor Services and Schwab Intelligent Portfolios. As the industry evolves, it’s likely that you’ll see more hybrid human-robo advisory investment models.

Can I just set it and forget it?

Robo-advisors may be many things, but they should not be treated like all-knowing financial gurus – just as financial planners should also not be left to make investments on your behalf completely unchecked.

That being said, you should not need to micromanage your robo advisor. Part of choosing a good investing method – in person or through a robo-advisor – is doing your research to make sure you are using a method you can trust and that fits your needs.

It is essential that you review your portfolio, particularly when changes are made, to make sure that your investments remain profitable over the long term and in line with your goals and risk comfort level. Remember: robo advisors will make adjustments for you, but sometimes losses will occur. That is the nature of investing in financial markets, in the short term, your investment values will go up and down. Historically, over the long term, financial investments have trended upwards.

Overall, investing with a robo-advisor is an easy process.

Robo-advisors are a great option for many people. With just a little research (and personal insight!), starting to invest with a robo advisor is extremely easy and can be rewarding.

Just like financial planners, robo advisors have a lot of know-how in terms of making smart investments. Still, they are no substitute for good financial sense. Be aware of what you are getting in to, and check your portfolio often enough that you are aware of and understand the trends in your investments.

Barbara Friedberg, MBA, MS is a former investment portfolio manager, author of Personal Finance; An Encyclopedia of Modern Money Management and How to Get Rich; Without Winning the Lottery. Friedberg is a former university Finance and Investments instructor, and publisher of Barbara Friedberg Personal Finance.com and Robo Advisor Pros. Her work has been featured in U.S. News & World Report, Yahoo! Finance, GoBankingRates, Huffington Post and many more publications. Follow her on TwitterGoogle+, and Pinterest


Leave a Reply