Financial advisors have a pretty sweet gig. You give them money, they tell you what to do with the rest of your money, and then you give them more money. Their jobs are much more complicated than this, but they exist to help you, their client, in exchange for fees.
Yet financial advisors might not always have your best interests at heart. A Department of Labor law up for debate would force them to work for you and only you, but President Trump has since delayed that law. This means that advisors can currently recommend services that aren’t great for you and pocket large commissions in exchange.
Fortunately, financial advising world is getting a much-needed shake-up. Thanks to advanced computer algorithms that work more efficiently than human financial advisors, you can plan for the future, spend less doing so, and not have to worry about your advisor screwing you over. These programs, called “robo-advisors,” can’t guide you over the phone (yet), but they can tell you what to invest in. Many even do the investing for you.
Even though these advanced algorithms can pick better retirement and investing options for you, are they worth listening to more than, say, a human advisor? Hell to the yes.
Your parents trust their financial advisors, but you probably don’t.
Financial advisors have been around for ages. After the 2007-2008 crash, however, people started trusting them a lot less. Remember: that crash happened after advisors and other financial professionals recommended mortgage-backed securities. When those went belly-up, younger people started looking online for information instead of their bank or financial institution. When scandals at financial institutions in the last several years came to light, more Americans got rid of their advisors and turned to their uncorrupted robotic counterparts.
Thanks to the widespread availability of information on sites like StockTwits and Google Finance, anyone can look up a stock’s performance and compare it to another security. To be fair, financial advisors do much more than that, but when you can educate yourself on the basics and make sound financial decisions for free, why would you pay anyone else to do that?
Robo-advisors aren’t real robots, but they act like them.
Let’s say you have $10,000 and want to invest it, but don’t know how. If you go to a robo-advising service like Wealthfront and Betterment, they will ask you for some background information, take your $10,000, and put it in stocks, bonds, and other funds that are most appropriate for you. Over time, the programs will sell some of those stocks and buy those they think will perform better. This lets you maximize your investment and potentially make more over time.
Human financial advisors do this too, but they take a lot more money from you when managing your portfolio takes up a chunk of their time. They also require significantly higher investment minimums and prefer not to deal with small accounts. Robo-advisors, however, often require small amounts to start investing, sometimes as low as $1. They also take smaller fees, as they’re just computer programs running in the cloud without much human interference.
Robo-advisors like the aforementioned apps and at big firms like Vanguard often invest in exchange-traded funds. These funds are highly liquid and can be bought or sold in an instant. While anyone can fire up their brokerage app and invest in an ETF, robo-advisors monitor their performance and buy/sell them based on mountains of data.
You don’t need to know anything about the stock market to use robo-advisors.
People go to financial advisors when they don’t know what to do with their money. Robo-advisors fulfill the same duties, but for cheaper and with increasing efficiency. Robo-advisors are also not going to try and upsell you on products you don’t need. The same cannot be said for financial advisors (until the Fiduciary rule is passed, if it ever is).
Robo-advisors aren’t always correct. No one can predict the future, after all, and when the stock market takes a dip, your assets will decrease. Yet their low cost, ease-of-use, and increase in accuracy and popularity make robo-advisors an attractive way to invest.
Should you invest with a robo-advisor? If you don’t know anything about the stock market but want to invest in it, robo-advisors are the way to go. Companies like Acorns and Wise Banyan are just a couple of the many startups offering low-fee access to robo-advisors. If you have an account with a leading financial company like Vanguard or Charles Schwab, chances are your firm also has robo-advisor programs.
Learning the ins and outs of the stock market is important, and figuring out how it works could save you from fees and financial headaches. Yet having a robo-advisor invest for you is better than not investing at all. And who knows? They might make better choices than you.