The worlds of investing and wealth-building are constantly evolving. Technology infuses its innovative tentacles into every crevice of the industry. And though challenges and concerns do arise from time to time, the overall trajectory is encouraging. In many cases, new technology means lower fees, greater accessibility, and better investor-side control.
At the heart of this fintech explosion, you’ll find robo-advisors. Some call them controversial or risky, while others hail them to be the next great iteration in investing. But the big question most people are asking is, should I be using a robo-advisor as part of my wealth-building and investing strategy?
The answer is…it depends. It depends on a lot of unique factors and circumstances that can’t possibly be dissected with a high degree of accuracy in a single sweeping article. However, I would like to give you a basic breakdown of what a robo-advisor is, the typical advantages of using one, and some of the drawbacks or sacrifices that you’ll experience when using a robo-advisory-based investment platform.
Robo-advisors are basically algorithm-driven financial planning tools that provide financial planning services with little or no human supervision. These platforms typically collect some information from the client about their current financial situation, their future financial goals, risk tolerances, and preferences. This information is then weighed against unpredictable and uncontrollable forces like market volatility and asset class performance to (ideally) create a portfolio that generates a healthy return on investment (ROI) without exposing the investor to unnecessary risk.
No two robo-advisors are identical. However, you’ll find that most of them operate in a similar fashion (at least from the user side of things).
Robo-advisors have been around in some form or fashion for more than a decade. However, they’ve only just become a mainstream option for investors.
Rewind to 2015 and robo-advisors were managing $47.3 billion in assets. By 2016, that number had more than doubled to $98.5 billion. By the end of 2022, it’s estimated that the more than 100 mainstream robo-advisor platforms on the web will oversee over $460 billion. That’s nearly 10x growth in a little under eight years.
Robo-advisors aren’t just trendy pieces of tech – they actually pack quite a powerful punch. Here are some of the biggest advantages of using robo-advisors to manage some of your wealth and oversee your investments.
As convenient and effective as robo-advisors can be, I’m not going to pretend like they’re the be-all and end-all for investing. There are still some downsides and potential risks associated with using these sophisticated platforms. Here are several of the biggest cons.
Robo-advisors have their pros and cons. At the end of the day, it’s up to each individual investor to weigh these factors against each other to make an educated decision. And if you do decide to use a robo-advisor, it’s imperative that you take the time to select the appropriate platform.
If you’re looking for more insights on how to select a robo-advisor, I’ve written several in-depth guides that will help you compare some of the top options in a head-to-head manner:
There are plenty of good options to consider.
And if you’re hesitant to go all-in on robo-advisory, remember that you can take a hybrid approach.
Many of these platforms offer tiered services where you get access to both the robo-advisor and a live Certified Financial Planner. Try what makes you feel comfortable!