The longer answer is that a robo-advisor is a service that uses highly specialized software to do the job of wealth managers or investment advisors – people who decide what type of investments you should be making and then tinker with those investments over time. Robo-advisors typically have you, the investor, answer a few questions to determine your appetite for risk and then, through the use of proprietary algorithms, spread your money into appropriate investments, making adjustments as your situation and the market change. When you open an account with a robo-advisor they typically collect around 1% less in fees than a professional investment advisor. Robo-advisors invest primarily in ETFs.
When you open an account with a Robo-advisor there are two main advantages. The first is lower fees. Let’s say you’ve got a nice nest egg of $50,000. A professional investment advisor who charges a 1% fee for recommending a portfolio will charge you $500 every year, whether your portfolio goes up or down. Plus, his portfolio recommendations might include pricey mutual funds (another 2% gone!) and lots of stock trading, both of which can eat into returns.
Robo-advisors invest primarily in inexpensive ETFs and only charge 0.50%, cutting that $500 yearly fee in half. And if you invest larger amounts of money? That 0.50% advisor fee shrinks even more with robo-advisors.
Robo-advisors also often negotiate lower yearly management fees for ETFs and offer investors free trading; those savings alone can be enough to counteract the small management fees they charge. Plus, robo-advisors rarely demand a minimum balance, which means just about anyone over 18 can invest.
Some robo-advisors perform automatic portfolio rebalances and tax-loss harvesting for free—both of which can be tedious and pricey with professional investment advisors.
Another advantage is the 24/7 accessibility and automation of robo-advisors. Since the companies operate entirely online, you can sign up, deposit money, check your balance, withdraw money, etc., all without getting out of your pajamas.
Note: Your choice of investments may be limited depending on the robo-advisor you use. At Wealthsimple, we use the following asset classes in our portfolios - stocks (Canadian, USA, Europe and emerging markets), fixed income and real estate. We believe they represent the best long-term sources of growth, income, and stability for investors.
Despite the name, not all robo-advisors offer real advice. And you won’t get any free pens or lollipops when you visit the office. Because there is no office. Or lollipops. At Wealthsimple, we believe that personal financial questions deserve professional personal answers. That’s why every client has access to a professional Portfolio Manager who can answer questions about your investments, your personal finance goals, or any other financial matter you’d like to discuss. Start investing now or find out more details here.