Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
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. They typically collect around 1% less in fees than a professional investment advisor. Robo-advisors invest primarily in ETFs.
Robo-advisors have two 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, their portfolio recommendations might include pricey mutual funds (another 2% gone!) and lots of stock trading, both of which can eat into returns. While there are some advantages to having a traditional financial planner this comes at a price.
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.
Another advantage is the 24/7 accessibility and automation of robo-advisors. Since the companies operate entirely online, you can sign up to a robo advisor, deposit money, check your balance, withdraw money, etc., all without getting out of your pajamas.
Some robo-advisors also perform automatic portfolio rebalances which can be tedious and pricey with professional investment advisors.
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 when you sign up to Wealthsimple you'll have 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. Get started investing with Wealthsimple now or find out more about our investment portfolios here.