Using a Robo Advisor to Supercharge Your Investing and Savings
One of the many transformative effects of the internet has been to bring down the cost of some services that used to be prohibitive, restricted to just a select few. An area where this effect is particularly pointed is in financial services, where access to professional investment management used to be just for the wealthy, with high annual fees of 2%, 3% per year and even more, and ultra high account minimums.
Today there is dual evolution underway in market access. The advent and proliferation of exchange traded funds (ETFs) has made it easier than ever before to gain broad exposure to asset classes, sectors, nations, and themes at a low cost. And new financial advisory services that are all digital and tailored to a specific individual – termed “robo advisors” – have made it so that even beginning investors with small balances can get their money working for them in less than an hour.
What is a Robo Advisor?
Robo advisors are digital investing platforms that offer some key features specific to younger investors and people starting out with modest investment amounts. Bringing professional investment guidance to the masses at a lower cost than ever before, robo advisors construct diversified portfolios of ETFs based on the individual objectives and characteristics of the customer.
When signing up with a digital investing platform, an individual can input their specific risk tolerance, age, income level, monthly savings goals, and other long-term financial targets. The platform will then apply Nobel Prize-winning investment methodologies to create a basket of funds that offer broad financial market access.
This is how professional money management for the high-net worth class has always worked; a HNW client sits down with one or more financial planners and investment professionals, talks through their goals and investment objectives, and a strategy is put into place. This high-touch approach came with a limitation; a prospective client would need to have upwards of $500,000 or more to even get into the door with an investment advisory.
Robo advisors have leveled the playing field, giving access to all. Most digital investing platforms today offer very low account minimums of around $5,000.
24/7 Access, 24/7 Monitoring of Investments
Some investors want to set money aside and forget about it, while others want to be able to peek in on things whenever they want. Robo advisors can please both camps – the customized portfolios have digital dashboards for 24/7 access to information, and each portfolio is constantly being rebalanced and fine-tuned to ensure that the client’s holdings are in line with their long-term objectives.
This automatic monitoring is key to dispelling one of the biggest roadblocks beginning investors have. They simply think, “I don’t have the time to keep track of everything”, and so they let their money sit in accounts that earn them no interest. Robo advisors were designed with these investors in mind; once a person’s ideal asset allocation is determined, the digital platform automatically makes buy and sell orders to individual constituent ETFs, so that the asset allocation remains at its intended setting.
Robo Advisors to Unlock Savings Habits
The best robo advisors are aligned with already-trusted financial institutions like a local bank. This facilitates not only free transfers into and out of a digital investing platform, but weekly or monthly automatic contributions can be set up in a snap. Another one of the biggest roadblocks to someone getting started with investing for their financial future is, “I don’t have enough money to get started”. This type of thinking can trap a well-meaning saver into losing years of investment time – and time is the #1 ally an investor has.
There’s a concept called the “time value of money”, which essentially means that a lump sum of money today is inherently worth more in the future – but only under the assumption that the lump sum of money can be earning interest, each and every year into that future. Without that money being invested, it’s likely to actually losevalue each year due to inflation.
Albert Einstein called the compounding of interest the “8th Wonder of the World”. Compounded interest simply means that as money has more time, more years earning a positive return, the ending savings that can be achieved starts to grow – exponentially!
Consider the following example of someone who decides to set aside $250 a month into an investing account that earns 8% per year.
Starts at age 25: Will have a $878,570 balance at age 65.
Starts at age 35: Will have a $375,073 balance at age 65.
Starts at age 45: Will have a $148,236 balance at age 65.
The power of compounding, literally time itself, is there to lift you to your long-term goals like retirement. But only if you engage with time by getting your money working for you today. Digital robo advisors have dissolved the roadblocks to getting started, like lack of time or lack of a big starting balance.
What to Look For in a Robo Advisor
The best digital investing platforms will have low account minimums to get started, and won’t charge a higher management fee for people that start with modest balances. Some robo advisors will have management fees over 1% per year (on the high side of the spectrum) until an account balance reaches a breakpoint of $50,000 or $100,000. The top-tier robo advisors will have a flat management fee for all new customers.
Another feature to be on the lookout for is access to real people – professionals on hand who can answer questions or provide financial planning consultations if the need arises. Some robo advisors are “fully remote”, providing little to no access to human interaction. This may be fine for some, but the best partnerships have a combination of digital freedoms, low costs, and access to financial professionals on tap.
There are many digital advisory investment services out there, but most people like to build on the trust they already have with their local banking institution, so check to see if your local bank has a robo advisor that can work for you to jumpstart your savings and retirement goals.
